As filed with the Securities and Exchange Commission on June 30, 2003
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
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(Mark One)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-14402
BANCO BILBAO VIZCAYA ARGENTARIA, CHILE S.A.
(formerly BBVA Banco BHIF)
(Exact name of Registrant as specified in its charter)
BILBAO VIZCAYA ARGENTARIA, CHILE BANK
(Translation of Registrant's name into English)
Chile
(jurisdiction of incorporation)
Huerfanos 1234
Santiago, Chile
Telephone: (562) 679-1000
(address and telephone of Registrant's principal executive offices)
Securities registered or to be registered
pursuant to Section 12(b) of the Act.
Name of each exchange
Title of each class on which registered
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American Depositary Shares, each representing New York Stock Exchange
the right to receive 10 Shares of Common
Stock of Banco Bilbao Vizcaya Argentaria,
Chile S.A. without par value
Shares of Common Stock of Banco Bilbao Vizcaya New York Stock Exchange*
Argentaria, Chile S.A. without par value
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* Shares are not listed for trading, but only in connection with the
registration of American Depositary Shares pursuant to the requirements of the
New York Stock Exchange.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
None
(Title of Class)
The number of outstanding shares of each class of common stock of Banco Bilbao
Vizcaya Argentaria, Chile S.A. at December 31, 2002 was:
361,222,027 Shares of Common Stock, without par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark which financial statement item the registrant
has elected to follow.
Item 17 [ ] Item 18 [X]
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TABLE OF CONTENTS
Page
----
PART I
Item 1. Identity of Directors, Senior Management and Advisers............................... 3
Item 2. Offer Statistics and Expected Timetable............................................. 3
Item 3. Key Information..................................................................... 3
Item 4. Information on the Company.......................................................... 15
Item 5. Operating and Financial Review and Prospects........................................ 65
Item 6. Directors, Senior Management and Employees.......................................... 93
Item 7. Major Shareholders and Related Party Transactions...................................100
Item 8. Financial Information...............................................................102
Item 9. The Offer and Listing...............................................................104
Item 10. Additional Information..............................................................106
Item 11. Quantitative and Qualitative Disclosures About Market Risk..........................120
Item 12. Description of Securities Other than Equity Securities..............................121
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.....................................121
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds........122
Item 15. Controls and Procedures.............................................................122
Item 16A. Audit Committee Financial Expert....................................................122
Item 16B. Code of Ethics......................................................................122
PART III
Item 17. Financial Statements................................................................122
Item 18. Financial Statements................................................................122
Item 19. Exhibits............................................................................122
PRESENTATION OF FINANCIAL INFORMATION
As a Chilean bank, Banco Bilbao Vizcaya Argentaria, Chile S.A. ("BBVA
Chile", and together with its consolidated subsidiaries, the "Bank" or "us" or
"we" or "ours" as the case may be) maintains its financial books and records in
Chilean pesos and prepares its consolidated financial statements in conformity
with accounting principles generally accepted in Chile ("Chilean GAAP") and the
rules of the Superintendencia de Bancos e Instituciones Financieras (the
Superintendency of Banks and Financial Institutions, which is referred to herein
as the "Superintendency of Banks") relating thereto, which together differ in
certain significant respects from accounting principles generally accepted in
the United States ("US GAAP"). References to "Chilean GAAP" in this Annual
Report are to accounting principles generally accepted in Chile, as supplemented
by the applicable rules of the Superintendency of Banks. See Note 28 to our
audited consolidated financial statements contained elsewhere in this Annual
Report (together with the notes thereto, the "Consolidated Financial
Statements") for a description of the principal differences between Chilean GAAP
and US GAAP, as they relate to us, and a reconciliation to US GAAP of net income
and shareholders' equity.
Pursuant to Chilean GAAP, unless otherwise indicated, financial data for
all full-year periods included in the Consolidated Financial Statements and
elsewhere throughout this Annual Report have been restated in constant Chilean
pesos of December 31, 2002. See Note 1.c) to the Consolidated Financial
Statements.
Unless otherwise specified, all references herein (except in the
Consolidated Financial Statements) to our loans are to loans and financial
leases before deduction of allowances for loan losses, and, except as otherwise
specified, all market share data presented herein is based on information
published periodically by the Superintendency of Banks. Past due loans include,
with respect to any loan, the portion of principal or interest that is 90 or
more days overdue; the entire outstanding balance of any loan is included in
past due loans only after legal collection proceedings have been commenced. This
practice differs from that normally followed in the United States where the
amount classified as past due would include the total principal and interest on
loans which have any portion overdue by 90 days or more. See "Selected
Statistical Information--Classification of Loan Portfolio Based on the
Borrower's Payment Performance".
Unless otherwise specified, all references herein (except in the
Consolidated Financial Statements) to "shareholders' equity" as of December 31
of any year are to shareholders' equity after deducting our net income for such
year, but all references to "average shareholders' equity" for any year are to
average shareholders' equity including our net income for such year.
Outstanding loans and the related percentages of our loan portfolio made to
middle and lower-middle income individuals and small, medium and large-size
companies in the section entitled "Business Overview" are categorized based on
the nature of the borrower. In the section entitled "Selected Statistical
Information", outstanding loans and related percentages of our loan portfolio
made up of such individual and corporate loans are categorized in accordance
with the reporting requirements of the Superintendency of Banks which are based
on the type and term of loans.
References in this Annual Report to the Chilean financial system include
all financial institutions operating in Chile (i.e., banks and finance
companies) and references to the Chilean banking system include only banks
operating in Chile.
1
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 20-F contains statements that constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements appear throughout this Annual
Report on Form 20-F and include statements regarding our intent, belief or
current expectations, our officers or our management with respect to (i) our
asset growth and financing plans, (ii) trends affecting our financial condition
and results of operations, including the effects of the acquisition of the Bank
by Banco Bilbao Vizcaya S.A. and the merger between Banco Bilbao Vizcaya S.A.
and Argentaria S.A., (iii) the impact of competition and regulations, and
(iv) our exposure to various types of market risks, such as interest rate risk,
foreign exchange rate risk and market price risk. Forward-looking statements
include known and unknown risks and uncertainties and are indicated by words
such as "anticipate", "believe", "expect", "intend", "risk", "could", "may",
"will", "seeks", and similar words and phrases and the negatives and variations
thereof. Such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and actual results may differ
materially from those described in such forward-looking statements in this
Annual Report on Form 20-F, including, without limitation, "Business Overview",
"Operating and Financial Review and Prospects" and "Quantitative and Qualitative
Disclosures About Market Risk".
Some factors that could cause actual results to differ materially from
those estimated by the forward-looking statements contained in this Annual
Report on Form 20-F include, but are not limited to: general economic conditions
in Chile and Latin America and the other countries in which we have significant
business activities or investments, including the United States; the monetary
and interest rate policies of the Central Bank; inflation; deflation;
unanticipated turbulence in interest rates, foreign exchange rates, equity
prices or other rates or prices; changes in Chilean and foreign laws,
regulations and taxes; changes in competition and pricing environments; natural
disasters; the inability to hedge certain risks economically; the adequacy of
loss reserves; technological changes; changes in consumer spending and saving
habits; and our success in managing the risks involved in the foregoing.
The forward-looking statements contained in this document speak only as of
the date of this report, and we do not undertake to update any forward-looking
statement to reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.
2
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
A. Selected Financial Data
The following table presents selected consolidated and other financial and
operating information for us and certain statistical information for Chile as of
the dates and for the periods indicated. This information should be read in
conjunction with the Consolidated Financial Statements and the sections entitled
"Operating and Financial Review and Prospects" and "Selected Statistical
Information" appearing elsewhere in this Annual Report. The selected
consolidated financial information as of December 31, 2001 and 2002 and for the
years ended December 31, 2000, 2001 and 2002 has been derived from the
Consolidated Financial Statements included elsewhere in this Annual Report which
have been audited by PricewaterhouseCoopers, independent accountants. The
selected financial data as of December 31, 1998, 1999 and 2000 and for the years
ended December 31, 1998 and 1999 has been derived from the Consolidated
Financial Statements audited by PricewaterhouseCoopers that are not included in
this Annual Report.
The Consolidated Financial Statements have been prepared in accordance with
Chilean GAAP (including the rules of the Superintendency of Banks), which differ
in certain significant respects from US GAAP. Note 28 to the Consolidated
Financial Statements provides a description of the principal differences between
Chilean GAAP and US GAAP as they relate to us and a reconciliation to US GAAP of
net income and shareholders' equity for periods and the dates covered thereby.
The financial data in the following tables as of and for all full-year
periods through December 31, 2002 is restated in constant Chilean pesos of
December 31, 2002. See Note 1.c) to the Consolidated Financial Statements.
Until December 31, 2001, mortgage finance bonds issued by the Bank were
considered permanent investment securities and classified under the caption
Other financial investments. On October 7, 2002, the Superintendency of Banks
issued Circular No. 3,196 which requires mortgage finance bonds issued by the
Bank to be presented net of its corresponding liability. To conform with current
year presentation, outstanding Mortgage finance bonds issued as of December 31,
2001, have also been presented net of its corresponding liability. Outstanding
mortgage finance bonds issued prior to year 2001 have been presented as in the
previous reports and have not been presented net of its corresponding liability.
3
As of or for the Year ended December 31,
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1998 1999 2000 2001 2002 2002
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(in millions of constant Ch$ of December 31, 2002)(1) (in thousands
of US$(2))
CONSOLIDATED INCOME STATEMENT
DATA
Chilean GAAP:
Interest revenue...................... 212,216 192,247 225,990 218,194 216,464 303,860
Interest expense...................... (141,787) (112,767) (145,911) (124,852) (107,450) (150,832)
Net interest revenue.................. 70,429 79,480 80,079 93,342 109,014 153,028
Provision for loan losses............. (29,568) (35,220) (24,459) (31,556) (31,316) (43,960)
Net interest revenue after
provision for loan losses.......... 40,861 44,260 55,620 61,786 77,698 109,068
Income from services, net............. 11,361 11,282 11,795 17,228 21,762 30,548
Other operating income, net:
Gains (losses) on financial
instruments, net................. 116 3,095 3,951 8,554 6,140 8,619
Foreign exchange
transactions, net................ 4,677 2,448 1,377 (4,162) (14,335) (20,123)
Recovery of loans previously
charged off...................... 3,407 4,993 7,674 7,500 9,696 13,611
Other income and expenses, net..... (511) (1,589) (15) 1,093 1,169 1,641
Operating expenses.................... (56,893) (57,563) (62,074) (71,295) (75,159) (105,503)
Loss from price-level restatement..... (2,509) (2,657) (5,388) (4,464) (4,164) (5,845)
Minority interest in
consolidated subsidiaries.......... (80) (50) (20) (24) (34) (48)
Income before income taxes............ 430 4,219 12,920 16,215 22,773 31,968
Income taxes.......................... (62) 5,401 1,984 (881) (2,518) (3,535)
Net income ........................... 368 9,620 14,904 15,335 20,255 28,433
Net income per Share (3).............. 1.50 33.17 48.39 42.48 56.11 0.0788
Net income per ADS (3) (4)............ 15.00 331.70 483.90 424.80 561.10 0.7876
Dividends per Share .................. 36.29 1.14 30.91 43.31 42.39 0.0595
Dividends per ADS (4)................. 362.90 11.40 309.10 433.10 423.90 0.5950
Weighted average shares
outstanding (in millions).......... 245 290 308 361 361 361
US GAAP:
Interest revenue...................... 211,303 191,217 225,224 217,385 215,698 302,785
Interest expense...................... (142,275) (116,627) (151,298) (129,316) (111,614) (156,678)
Net interest revenue.................. 69,029 74,591 73,926 88,069 104,084 146,107
Provision for loan losses............. (26,393) (30,727) (16,887) (24,136) (21,637) (30,373)
Net income (loss) .................... (1,347) (625) 9,510 15,620 16,917 23,747
Net income (loss) per Share (4)....... (5.50) (2.16) 30.88 43.27 46.86 0.0658
Net income (loss) per ADS (4)(5)...... (55.00) (21.60) 308.80 432.70 468.60 0.6578
4
As of or for the Year ended December 31,
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1998 1999 2000 2001 2002 2002
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(in millions of constant Ch$ of December 31, 2002)(1) (in thousands
of US$(2))
CONSOLIDATED BALANCE SHEET DATA
Chilean GAAP:
Cash and due from banks............... 142,807 151,882 164,499 205,110 311,023 436,597
Investments........................... 157,972 319,875 495,062 390,266 645,880 906,651
Loans, net of allowance for
loan losses........................ 1,350,872 1,442,558 1,666,211 1,797,895 2,053,519 2,882,618
Other assets.......................... 86,367 94,738 187,953 150,590 185,782 260,791
Total assets.......................... 1,738,018 2,009,053 2,513,726 2,543,861 3,196,204 4,486,657
Deposits.............................. 911,083 1,139,012 1,231,066 1,425,332 1,912,485 2,684,641
Borrowings............................ 577,382 608,299 846,137 732,956 868,696 1,219,429
Other liabilities..................... 80,015 81,978 186,071 135,365 157,888 221,634
Minority interest in
consolidated subsidiaries.......... 69 127 64 88 113 159
Shareholders' equity (6).............. 169,100 170,016 235,485 234,785 236,767 332,361
US GAAP:
Total assets.......................... 1,662,236 1,928,960 2,435,316 2,411,417 3,114,139 4,371,458
Shareholders' equity(7)............... 192,423 188,691 252,466 245,775 255,345 358,439
Long-term borrowings.................. 435,441 436,403 415,241 401,964 452,661 635,421
CONSOLIDATED RATIOS
Chilean GAAP:
Profitability and Performance:
Net interest margin(8)................ 4.68% 4.64% 4.30% 4.22% 4.46%
Return on average total
assets(9).......................... 0.02% 0.49% 0.68% 0.59% 0.71%
Return on average shareholders'
equity(10)......................... 0.31% 5.58% 7.63% 6.28% 8.21%
Capital:
Average shareholders' equity as
a percentage of average
total assets....................... 6.84% 8.70% 8.95% 9.34% 8.67%
Bank regulatory capital as a
percentage of minimum
regulatory capital required
(11)............................... 185.00 167.09 192.20 177.16 145.30
Basic capital to total assets......... 10.30 8.70 9.64 9.44 7.60
Total capital to risk adjusted
assets............................. 14.80 13.40 15.40 14.17 11.62
Credit Quality:
Past due amounts/total loans(12)...... 1.78% 1.77% 1.82% 2.10% 1.97%
Category B-, C and D
loans/total loans(13).............. 3.72 5.01 5.11 4.86 4.24
Non-performing loans/total
loans(14).......................... 3.37 3.45 3.25 3.41 2.97
Allowance for loan losses/total
loans.............................. 1.92 2.62 2.25 2.35 2.15
5
As of or for the Year ended December 31,
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1998 1999 2000 2001 2002 2002
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(in millions of constant Ch$ of December 31, 2002)(1) (in thousands
of US$(2))
Allowance for loan losses/past
due amounts(12).................... 106.39 152.09 126.00 111.93 108.99
Allowance for loan losses/
category B-, C and D
loans(13).......................... 51.72 52.20 43.92 48.37 50.65
Allowance for loan
losses/non-performing
loans(14).......................... 44.93 75.73 69.01 68.82 72.36
Past due amounts/shareholders'
equity(6).......................... 14.69 14.98 12.90 16.46 17.46
Productivity:
Loans per employee (net of
allowances)(Ch$)................... 801.70 828.10 918.53 959.90 1,163.47
Operating Ratios:
Operating expenses/operating
revenue, net(15)................... 65.71 59.77 63.86 62.02 61.31
Operating expenses/average
total assets(10)(16)............... 3.25 2.91 2.84 2.73 2.64
OTHER DATA
Inflation Rate(17).................... 4.3 2.3 4.5 2.6 2.8%
Revaluation (devaluation) rate
(Ch$/US$).......................... 4.6 11.4 8.5 12.7 7.9
Employees............................. 1,685 1,742 1,814 1,873 1,765
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(1) Except per share and per American Depositary Share ("ADS") data,
percentages, ratios, number of shares and number of employees.
(2) Except per share and per ADS data, percentages and ratios. Amounts stated
in U.S. dollars as of or for the year ended December 31, 2002 have been
translated from Chilean pesos at the Observed Exchange Rate of Ch$712.38 =
US$1 for December 31, 2002.
(3) Net income per share and per ADS data under both Chilean and US GAAP have
been calculated on the basis of the weighted average number of shares
outstanding during the period. Shares which are not fully paid for are not
entitled to receive dividends and have not been considered. As of December
31, 2002, 361,222,027 shares were entitled to receive dividends.
(4) Calculated on the basis of 10 common shares per ADS. Dividends per ADS do
not reflect any deductions of Chilean withholding taxes or for the charges
described in "Description of American Depositary Receipts--Charges of
Depositary" and "Taxation".
(5) Net income under US GAAP for the year 1998 reflects charges relating to the
amortization of goodwill on the purchase of Banesto Chile of Ch$4,404
million. The goodwill has been fully amortized in 1999 with charges of
Ch$3,160 million. See Notes 1.n) and 28.1.q) to the consolidated financial
statements.
(6) Shareholders' equity at December 31, 1998, 1999, 2000, 2001 and 2002
excludes net income for the year then ended, as applicable. The amounts so
excluded are Ch$368 million, Ch$9,620 million, Ch$14,904 million, Ch$15,335
million and Ch$20,255 million, for the years ended December 31, 1998, 1999,
2000, 2001, and 2002 respectively.
(7) Including the mandatory dividend described in Note 28.1.c to the
consolidated financial statements.
(8) Net interest revenue divided by average interest earning assets.
6
(9) Net income divided by average total assets in 1998, 1999, 2000, 2001 and
2002. Average total assets were calculated on the basis of daily balances
of BBVA Chile and on the basis of monthly balances for its subsidiaries.
(10) Net income divided by average shareholders' equity in 1998, 1999, 2000,
2001 and 2002. Average shareholders' equity used in the calculation
includes our net income for the applicable period.
(11) According to the current General Banking Law, banks should have a minimum
ratio of Total Capital to Risk Adjusted Assets of 8%, net of required
allowances for loan losses, and a minimum ratio of Basic Capital to Total
Assets of 3%, net of required allowances for loans losses.
(12) Past due loans include, with respect to any loan, the portion of principal
or interest that is 90 days or more overdue; the entire outstanding balance
of any loan is included in past due loans only after legal collection
proceedings have been commenced.
(13) All loans in categories B-, C and D are substandard loans. See "Selected
Statistical Information--Classification of Loan Portfolio".
(14) Non-performing loans includes loans which do not accrue interest and
restructured loans. See "Selected Statistical Information--Classification
of Loan Portfolio Based on the Borrower's Payment Performance".
(15) Operating expenses divided by net operating revenue. Net operating revenue
consists of net interest revenue, income from services (net), other
operating income (net) and other income and expenses.
(16) Average total assets were calculated as an average of the beginning and
ending balance for each period.
(17) As measured by the percentage change in the official Consumer Price Index
("CPI") of the Instituto Nacional de Estadisticas (the Chilean National
Institute of Statistics) of the previous month. Such inflation differs from
the inflation rate used for purposes of price-level restatements of our
financial statements, which has a one-month lag. See Note 1.c) to the
Consolidated Financial Statements.
Exchange Rates
In this Annual Report on Form 20-F, references to "$", "US$", "U.S.
dollars" and "dollars" are to United States dollars, references to "pesos" or
"Ch$" are to Chilean pesos and references to "UF" are to Unidades de Fomento.
The UF is an inflation-indexed Chilean monetary unit with a value in Chilean
pesos that changes daily to reflect changes in the official Consumer Price Index
("CPI") of the Instituto Nacional de Estadisticas (the Chilean National
Institute of Statistics) of the previous month. See Note 1.c) to the
Consolidated Financial Statements.
This Annual Report on Form 20-F contains translations of certain Chilean
peso amounts into U.S. dollars at specified rates solely for the convenience of
the reader. These translations should not be construed as representations that
the Chilean peso amounts: (i) actually represent such U.S. dollar amounts, (ii)
were converted from U.S. dollars at the rate indicated in preparing the
Consolidated Financial Statements, (iii) could be converted into U.S. dollars at
the rate indicated or (iv) were converted at all. Unless otherwise indicated,
such U.S. dollar amounts, in the case of information concerning BBVA Chile as of
and for the years ended December 31, 1999, 2000 and 2001, have been translated
from Chilean pesos based on the Observed Exchange Rate (as defined herein)
reported by the Banco Central de Chile (the "Central Bank") on December 31,
2002, which was Ch$712.38 per US$. The rate reported by the Central Bank on
December 31, 2002 is based upon the actual exchange rate of December 30, 2002
and is the exchange rate specified by the Superintendency of Banks for use by
Chilean banks in the preparation of their financial statements for the period
ended December 31, 2002. The Federal Reserve Bank of New York does not report a
noon buying rate for Chilean pesos.
Since the enactment of the Chilean Central Bank Act in 1989, any person may
freely buy and sell foreign exchange. The Central Bank, however, may require
that certain purchases and sales of foreign exchange specified by law must be
carried out exclusively in the Mercado Cambiario Formal (the "Formal Exchange
Market"), may impose restrictions on foreign exchange transactions, and may
intervene in the Formal Exchange Market purchasing and selling foreign currency.
7
The Formal Exchange Market is formed by local banks and other entities so
authorized by the Central Bank. Authorized transactions are generally carried
out at spot rates. The daily observed exchange rate "dolar observado" (the
"Observed Exchange Rate") is, for any date, the average exchange rate of
transactions in the Formal Exchange Market on the previous day, as certified and
published by the Central Bank on the banking day immediately following such day.
For purposes of the operation of the Formal Exchange Market and until
September 1999, authorized transactions by banks were generally transacted
within a certain band above or below that of a reference exchange rate. The
reference exchange rate (dolar acuerdo) (the "Reference Exchange Rate") was
reset monthly by the Central Bank, taking internal and external inflation into
account, and was adjusted daily to reflect variations in parities among the U.S.
dollar, the Japanese yen and the Euro in the international markets. The
Reference Exchange Rate is the rate at which the Central Bank carried out its
foreign exchange operations. In order to maintain the average exchange rate
within such limits, the Central Bank intervened by selling and buying foreign
currencies on the Formal Exchange Market.
On September 2, 1999, the Central Bank resolved to eliminate the exchange
rate band as an instrument of exchange rate policy, introducing more flexibility
to the exchange market. At the same time, the Central Bank announced that an
intervention in the exchange market by buying or selling foreign exchange on the
Formal Exchange Market would take place only in special and qualified cases.
Purchases and sales of foreign exchange may be effected outside the Formal
Exchange Market, through the Mercado Cambiario Informal (the "Informal Exchange
Market"), which is a recognized currency market in Chile. The Informal Exchange
Market reflects the supply and demand for foreign currency by entities not
authorized to operate in the Formal Exchange Market, such as stock brokers,
travel agencies and others. There are no limits imposed on the extent to which
the rate of exchange in the Informal Exchange Market can fluctuate above or
below the Observed Exchange Rate. We estimate that since 1991, the year-end rate
of exchange for Chilean pesos into dollars on the Informal Exchange Market has
fluctuated between approximately 1.0% below and 5.0% above the Observed Exchange
Rate. As of December 30, 1998, the rate of exchange for Chilean pesos into U.S.
dollars on the Informal Exchange Market was 0.27% below the Observed Exchange
Rate, 1.1% above the Observed Exchange Rate as of December 31, 1999, 0.21% above
the Observed Exchange Rate as of December 31, 2000, and 0.7% above the Observed
Exchange Rate as of December 31, 2001. As of December 31, 2002, the Informal
Exchange Market was 1.1% above the Observed Exchange Rate.
The following table sets forth for each of the last five years, the annual
low, high, average and year-end Observed Exchange Rates for dollars as reported
by the Central Bank. No representation is made that the Chilean peso or the
dollar amounts referred to herein actually represent, could have been or could
be converted into dollars or Chilean pesos, as the case may be, at the rates
indicated, at any particular rate or at all.
----------------------------------------------------
Observed Exchange Rates of Ch$ per US$1.00
----------------------------------------------------
Low(1) High(1) Average Year-End
------ ------- -------------- --------
Year
1998.................... 439.18 475.41 460.29 (2) 473.77
1999.................... 468.69 550.93 508.78 (2) 527.70
2000.................... 501.04 580.37 538.87 (2) 572.68
2001.................... 557.13 716.62 633.69 (2) 656.20
2002.................... 641.75 756.56 689.24 (3) 712.38
Months
December 2002........ 692.94 712.38 701.95 (3)
January 2003......... 709.22 738.87 722.48 (3)
February 2003........ 733.10 755.26 745.21 (3)
March 2003........... 725.79 758.21 743.28 (3)
April 2003........... 709.32 731.56 718.58 (3)
May 2003............. 694.22 713.73 703.58 (3)
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8
Source: Central Bank
(1) Exchange rates are for the actual low and high days for each period.
(2) The average of monthly average rates during the period.
(3) The average of daily average rates during the period. The Observed Exchange
Rate reported by the Central Bank on December 27, 2002 was Ch$712.38 =US$1
and on June 30, 2003 was Ch$707.19 =US$1.
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
You should consider the following risks with respect to an investment in
our company and investments in Chilean corporations that are not normally
associated with investments in securities of issuers in the United States and
other jurisdictions.
OUR GROWTH, ASSET QUALITY AND PROFITABILITY MAY BE AFFECTED BY VOLATILE
MACROECONOMIC CONDITIONS IN CHILE.
All of our operations are conducted and substantially all of our customers
are located in Chile. Accordingly, our ability to recover on our loans and our
financial condition and results of operations are substantially dependent on
economic conditions prevailing from time to time in Chile, particularly in those
segments of the retail and corporate markets in which our business is primarily
focused. During the first three months of 2003, the Chilean economy is estimated
to have grown 3.5% as compared to the first quarter of year 2002. While the
Chilean economy has experienced growth as evidenced by annual increase in
Chile's gross domestic product ("GDP") of 6.6%, 3.2%, -0.8%, 4.2%, 3.1% and
2.1%, respectively, for the years 1997 through 2002, and an average annual
increase of 2.4% over the ten year period 1993-2002, there can be no assurance
that such annual growth will continue in the future. Future developments in the
Chilean economy could impair our ability to proceed with our business
strategies, our financial condition or our results of operations. Our financial
condition and results of operations could also be adversely affected by changes
in economic or other policies of the Chilean government, which has been
exercising substantial influence over many aspects of the private sector, or
other political or economic developments in or affecting Chile, as well as
regulatory changes or administrative practices of Chilean authorities, over
which we have no control. See "Chilean Regulation and Supervision".
In addition, our financial condition and results of operations could be
affected by changes in the level of economic activity in other Latin American
countries as well as countries outside Latin America, as a significant portion
of our loans are to finance Chilean foreign trade. Although economic conditions
are different in each country, investor reaction to developments in one country
can have significant effects on the economic environment in other countries,
including Chile. For example, political and economic developments in December
1994 and early 1995 in Mexico, the economic crisis in several Asian nations in
the second half of 1997 and the Brazilian Real devaluation on January 12, 1999,
have had a negative impact on the financial and securities markets in many
emerging market countries, including Chile. The Mexican currency crisis and its
aftermath had a negative impact on emerging markets generally, including Chile,
although in Chile the impact was negligible, mainly a temporary decrease in
Chilean exports to Mexico from US$212 million in 1994 to US$132 million in 1995,
while total Chilean exports increased from US$11,604 million in 1994 to
US$16,039 million in 1995. The economic crisis in several Asian nations in the
second half of 1997 had a significant negative impact on the Chilean economy, on
two levels. First, it affected negatively our terms of exchange, driving the
price of our exports (and particularly the price of copper) to their lowest
level in many years; second, it invited speculative activity towards the Chilean
peso, thus causing a marked increase in local interest rates and, consequently,
causing a decrease in the GDP growth from levels around 7%, sustained over most
of the 90's, to a negative growth of around 1% in 1999. The recovery of the
9
economy has been slow, and has been affected by the Brazilian Real devaluation
on 1999 and by the recent Argentine crisis. The most visible effect of the
latter crisis has been a sustained devaluation of the local currency during most
of 2001, a process that started to reverse itself slowly but steadily since
November 2001. Inflation has remained low due to the reduced economic activity.
ALTHOUGH CHILE HAS A HISTORY OF MODERATE INFLATION, THERE IS A RISK THAT WE
COULD EXPERIENCE INFLATIONARY PRESSURES WHICH WOULD HAVE AN ADVERSE IMPACT ON
OUR BUSINESS.
The annual rate of inflation (as measured by changes in the CPI and as
reported by the Chilean National Institute of Statistics) in 1997, 1998, 1999,
2000, 2001 and 2002 was 6.0%, 4.7%, 2.3%, 4.5%, 2.6% and 2.8%, respectively.
Within this context, the Central Bank changed its reference interest rate from
a real interest rate definition to a nominal definition. Thus, on July 26, 2001,
this rate was changed from a 3.5% real interest rate to a 6.5% nominal interest
rate, assuming a 3% inflation for the year. From then on, the reference rate has
been expressed in nominal terms.
The reduced level of inflation (by local standards) is explained by a low
level of consumer expenditures as well as by the decreasing dollar prices of
imported consumer goods. This moderate inflationary trend allowed the Central
Bank to reduce the reference interest rate eight times during the year 2002,
bringing it from 6.5% in January to 3.0% at the end of the year. The downward
trend was immediately followed (and at times anticipated) by the interest rate
on long term instruments from the Central Bank.
Inflation for the twelve months ended March 31, 2003 was 4.5%. Although
Chilean inflation has proved moderate in recent years, in the past Chile has
experienced high levels of inflation. A return to high levels of inflation in
Chile could adversely affect the Chilean economy and have an adverse impact on
our business and results of operations. There can be no assurance that Chilean
inflation will not change significantly from the current level. See "Operating
and Financial Review and Prospects--Inflation".
Although we currently benefit from inflation in Chile due to the structure
of our assets and liabilities (i.e., a significant portion of our deposits are
not indexed to the inflation rate and do not accrue interest (such as checking
accounts, the majority of which do not earn interest), and a significant portion
of our loans are indexed to the inflation rate), there can be no assurance that
our operating results in the future will not be adversely affected by changing
levels of inflation or by changes in the Chilean regulations such as the one
allowing payment of interest on deposit accounts, which became effective June 1,
2002.
BECAUSE ECONOMIC STABILITY IN CHILE HAS DEPENDED, TO SOME EXTENT, ON THE
STABILITY OF THE EXCHANGE RATE, A POLITICAL DECISION TO MODIFY THE CURRENT
STATUS OF THE REGULATION COULD HAVE AN ADVERSE EFFECT ON THE ECONOMY AND OUR
PROFITABILITY.
The Chilean peso has been subject to large nominal devaluations in the past
and may be subject to significant fluctuations in the future. In the five-year
period ended December 31, 2002, the value of the Chilean peso relative to the
U.S. dollar decreased approximately 60% in nominal terms and approximately 5% in
real terms, based on the Observed Exchange Rates for U.S. dollars on December
31, 1997 and December 31, 2002. See "Exchange Rates". Our results of operations
have not been significantly affected by fluctuations in the exchange rates
between the Chilean peso and the dollar because of our policy and Chilean
regulations relating to the control of material exchange transactions. At March
31, 2003, we had a net foreign currency exposure of Ch$15,493 million (US$21.3
million), equal to 6.0% of our capital and reserves (below the 20% permitted
under regulations of the Superintendency of Banks) See "Operating and Financial
Review and Prospects--Exchange Rate Risk". No assurance can be given that our
policy or the regulations will continue. In the absence of this policy and
regulations, and in the event of a devaluation of the Chilean peso, the
financial condition and results of operations of Chilean companies, including
us, and the ability of the Chilean companies to meet their obligations in
foreign currencies, could be adversely affected. The Chilean government's
economic policies and future fluctuations in the value of the Chilean peso
against the U.S. dollar could adversely affect our operating results.
10
OUR CUSTOMER BASE IS PARTICULARLY SENSITIVE TO ADVERSE DEVELOPMENTS IN THE
CHILEAN ECONOMY, WHICH RENDERS OUR LENDING ACTIVITIES RELATIVELY RISKIER THAN
LENDING TO HIGHER-INCOME CUSTOMERS.
We have developed our lending business with particular emphasis on the
Personal Banking and Corporate Banking divisions, although restricted by
conservative risk policies. At December 31, 2002, those divisions accounted for
67.4% of our loan portfolio (excluding contingent and past due loans). Adverse
changes affecting any of the above mentioned sectors is likely to have a
significant adverse impact on our loan portfolio and, as a result, on our
financial condition and results of operations.
A significant part of our customers consists of :
o large and corporate companies, with annual sales over US$10
million; and
o individual customers in all income segments, most of them
customers with monthly income between Ch$200,000 (US$350) and
Ch$1.5 million (US$2,600).
Medium and small-size companies and middle and lower-middle income
individuals typically have less financial strength and accordingly can be
expected to be more adversely affected by adverse developments in the Chilean
economy than large companies and high income individuals. As a result, it is
generally accepted that lending to these segments of our existing customer base
represents a relatively higher degree of risk than lending to other groups.
Important features of our strategy are to increase lending and the
provision of other services through cross-sales, and to gain new customers in
every customer segment, particularly in the upper income and corporate segments.
Consequently, though we may experience higher levels of past due amounts which
could result in higher levels of allowance for loan losses, the probability is
lower than in previous years since we have reduced the proportion that the more
vulnerable segments represent in our portfolio. Moreover, we believe that the
net interest margins on lending to the lesser income groups more than compensate
for the higher risk. We also believe that our experience in making loans to
these groups gives us an advantage over our competitors in identifying the less
risky customers in these groups, since we have historical evidence of the
factors that correlate with good payment behavior. However, we cannot assure you
that we will not suffer substantial adverse effects on our base portfolio in the
event of adverse developments in the Chilean economy.
SIGNIFICANT COMPETITION AS A RESULT OF THE LIMITED BARRIERS TO ENTRY AND
CONTINUED CONSOLIDATION OF THE CHILEAN BANKING INDUSTRY COULD INTENSIFY PRICE
COMPETITION AND LIMIT OUR ABILITY TO INCREASE MARKET SHARE.
Because Chilean regulations do not impose barriers to entry into the
Chilean market and do not restrict capital movements, we face significant
competition from both domestic and foreign commercial and investment banks. The
regulatory framework in the Chilean financial system has led to increased
consolidation both in the universal bank sector and in the sectors of financial
institutions specializing in specific products or markets. Concentration, as
measured by the participation of the 10 major banks in total deposits, increased
from 72.4% at December 31, 1998 to 76.0% at December 31, 2002. The increase in
concentration occurred mainly in 2002, when Banco Chile merged with Banco
Edwards and Banco Santander merged with Banco Santiago.
Consolidation in the Chilean market has given the opportunity to other
competitors to increase their branch network and gain proximity to compete for
banking penetration. Traditional competitors with international name recognition
and easy access to financial and technical resources made the market more
competitive, thereby constraining our growth strategy.
Furthermore, we also face competition from non-bank competitors, such as:
o department stores (for some credit products);
o leasing companies;
11
o factoring companies;
o mutual funds;
o pension funds; and
o insurance companies.
Such competitors generally enjoy regulatory advantages vis-a-vis banks. The
banking rules subject banks like us to the more stringent capital requirements
described in "Chilean Regulation and Supervision". Our advertising and promotion
is also subject to stricter transparency requirements, which compel banks to
disclose in fine print the total financial cost of the bank products they
advertise. For more details regarding our competitive position, see "Business
Overview--Competition".
A REVERSAL IN THE RATE OF GROWTH OF THE CHILEAN ECONOMY COULD ADVERSELY
AFFECT THE RECENT GROWTH OF OUR LOAN PORTFOLIO AND INCREASE THE POTENTIAL FOR
REQUIREMENTS OF ALLOWANCES FOR LOAN LOSSES.
During the period from 1997 through 2002, the volume of our loans has grown
at an average annual rate of 11.3%, from Ch$1,341,730 million at December 31,
1997 to Ch$2,098,564 million at December 31, 2002. Our portfolio grew
approximately 2.3% to Ch$2,145,762 million at March 31, 2003 from Ch$2,098,564
million at December 31, 2002. The growth in our loan portfolio during these
periods can be attributed generally to the continued growth of the Chilean
economy, an increased level of savings and investment, and to our increased
efforts in commercial activity and creativity, which enabled us to gain market
share. During 2002, the volume of our loans grew by 14.0% principally as a
result of our branch network expansion in previous years, of marketing
campaigns, and mostly of the launching of innovative and convenient new
products. No assurance can be given that the trends described will continue in
the future. A reversal in the rate of growth of the Chilean economy could
adversely affect the rate of growth of the our portfolio and its risk index and,
accordingly, increase the amount of allowance for loan losses it is required to
maintain. Also, the further expansion in our loan portfolio may expose us to a
higher level of loan losses and require us to establish higher levels of
allowance for such losses. See "Loans" and "Risk Index".
OUR LOAN PORTFOLIO IS CONCENTRATED IN CERTAIN SECTORS.
We have developed our lending business with particular emphasis in the
residential mortgage, foreign trade and business segments. At March 31, 2003,
those segments accounted for 67.8% of our loan portfolio (excluding contingent
and past due loans). See "Selected Statistical Information--Analysis of our Loan
Classifications". The quality of our loan portfolio is dependent on domestic
economic conditions affecting medium and small-size companies and the middle and
lower-middle income segments of the population, as well as on international
economic conditions affecting Chile's foreign trade. Adverse changes affecting
any of the above mentioned sectors is likely to have an adverse impact on our
loan portfolio and, as a result, on our financial condition and results of
operations.
OUR BUSINESS IS PARTICULARLY VULNERABLE TO VOLATILITY IN INTEREST RATES.
Our results of operations are substantially dependent upon the level of our
net interest income, which is the difference between interest income from
interest-earning assets and interest expense on interest-bearing liabilities.
Interest rates are highly sensitive to many factors beyond our control,
including deregulation of the financial sector, monetary policies, domestic and
international economic and political conditions and other factors.
Changes in market interest rates could affect the interest rates charged on
the interest-earning assets differently from the interest rates paid on
interest-bearing liabilities. This difference could result in an increase in
interest expense relative to interest income leading to a reduction in our net
interest income. Income from treasury operations is particularly vulnerable to
interest rate volatility. Rising interest rates may also bring about an
increasing non-performing loan portfolio.
12
SINCE OUR PRINCIPAL SOURCES OF FUNDS ARE SHORT-TERM DEPOSITS, A SUDDEN
SHORTAGE OF FUNDS COULD CAUSE AN INCREASE IN OUR COSTS OF FUNDING AND AN ADVERSE
EFFECT ON OUR OPERATING REVENUES.
Historically, funding in Chile has been short-term, being today's average
funding duration approximately 80 days. Consistent with this funding structure,
our principal sources of funds have traditionally been short-term savings,
certificates of deposit and demand deposits. Since we rely heavily on short-term
deposits for our funding, we cannot assure you that, in the event of a sudden or
unexpected shortage of funds in the banking systems and money markets in which
we operate, we will be able to maintain our levels of funding without incurring
higher funding costs or the liquidation of certain assets.
At December 31, 2002, 94.8% of our time deposits were in amounts greater
than Ch$25 million (US$35,000). Time deposits have represented 71.9%, 73.2% and
73.05% of total funding from clients at the end of 2000, 2001 and 2002,
respectively. Large-denomination time deposits may, under some circumstances, be
a less stable source of deposits. However, our management believes that, by
having 69.3% of our time deposits coming from individuals, and by having 8,329
clients with large-denomination deposits, we enjoy greater bargaining power
vis-a-vis this type of customer, which would allow us to adjust our lending
rates to a sudden increase in our funding costs. Therefore, we believe we are
well positioned to deal with the risks associated with these time deposits.
SIGNIFICANT COMPETITION AS A RESULT OF LIMITED BARRIERS TO ENTRY AND
CONTINUED CONSOLIDATION OF THE CHILEAN BANKING INDUSTRY COULD INTENSIFY PRICE
COMPETITION AND LIMIT OUR ABILITY TO INCREASE OUR MARKET SHARE.
The Chilean market for financial services is highly competitive. We compete
with other Chilean private banks, and with BancoEstado, that make consumer
credit available to an important portion of the Chilean population. The upper
and upper-middle income segments of the Chilean population and the corporate and
large companies have become the target of several banks and competition in those
segments is likely to increase. Accordingly, net interest margins are likely to
be subject to greater pressure. Although we believe that demand for financial
products and services from all income segments of the population and for
companies of all sizes will continue to grow during the remainder of the decade,
no assurance can be given that net interest margins will continue at present
levels.
The Chilean banking industry has experienced competition in recent years,
which has led to, among other things, consolidation in the industry. We expect
the trends of increased competition and consolidation to continue, and result in
the formation of new large financial groups. Recently, Banco Edwards was merged
into Banco de Chile, allowing the latter to reach a 18.6% loan market share, and
Banco Santiago merged with Banco Santander, a merger that created the largest
bank in Chile (24.4% loan market share). See "Operating and Financial Review and
Prospects--Competition".
A DISPOSITION OF OUR SHARES BY OUR PRINCIPAL SHAREHOLDERS COULD ADVERSELY
AFFECT THE TRADING PRICE OF OUR SHARES AND ADS.
We are controlled by BBVA and as of December 31, 2002, BBVA controlled
65.55% of the outstanding shares. See "Major Shareholders and Related Party
Transactions--Principal Shareholders". A disposition by BBVA or the other
significant shareholders, or by entities controlled by any of them, of a
significant portion of the shares of our common stock (the "Common Shares"), or
the perception that such a disposition may occur, could adversely affect the
trading price of the Shares on the Chilean Stock Exchanges (and, consequently,
the trading prices of the ADS) and could affect our control. See "Major
Shareholders".
THE RELATIVE ILLIQUIDITY AND VOLATILITY OF CHILEAN SECURITIES MARKETS COULD
ADVERSELY AFFECT THE PRICE OF BBVA CHILE ADS AND THE COMMON SHARES.
The Chilean securities markets are substantially smaller and less liquid
than the major securities markets in the United States. In addition, the Chilean
securities markets may be affected materially by developments in other emerging
markets, particularly other countries in Latin America. The low liquidity of the
Chilean market may impair the ability of holders of ADS to sell Shares withdrawn
from the ADS program into the Chilean market in the amount and at the price and
time they wish to do so.
13
The current Argentine crisis may also affect foreign investors' risk
perception of investing in Chile. After prolonged periods of recession, followed
by political instability, Argentina in 2001 announced that it would not service
its public debt. In order to address the worsening economic and social crisis,
the Argentine government abandoned its decade-old fixed US dollar/ Chilean peso
exchange rate and created a floating exchange rate regime in January 2002.
Argentina is a trading partner of Chile, and the continuation of the Argentine
crisis could affect the revenues and profitability of companies with ties to
Argentina.
CHILEAN CONTROLS ON FOREIGN INVESTMENT AND REPATRIATION OF INVESTMENTS AND
CHILEAN WITHHOLDING TAX REQUIREMENTS ARE RELATIVELY ONEROUS.
Equity investments in Chile by persons who are not Chilean residents are
generally subject to various exchange control regulations that govern the
repatriation of the investments and earnings therefrom. Holders of the ADS and
The Bank of New York ("the Depositary") have the benefit of a contract, the
"Foreign Investment Contract" among the Depositary, us and the Central Bank. See
"The Central Bank". The Foreign Investment Contract grants the Depositary and
the holders of the ADSs access to Chile's Mercado Cambiario Formal, the "Formal
Exchange Market", permits the Depositary to remit dividends it receives from
BBVA Chile to the holders of ADSs and permits the holders of ADSs to repatriate
the proceeds of the sale of the Shares withdrawn from the ADS facility thereby
enabling them to acquire on more favorable terms the foreign exchange necessary
to repatriate investments in the Shares and earnings therefrom. See "Chilean Tax
Considerations". Pursuant to current Chilean law, the Foreign Investment
Contract may not be amended unilaterally by the Central Bank, and there are
judicial precedents (which are not binding with respect to future judicial
decisions) indicating that a contract such as the Foreign Investment Contract
may not be abrogated by future legislative changes. Owners of the ADSs will be
entitled to receive dividends on our underlying shares to the same extent as the
holders of Common Shares. Dividends received by holders of ADS will be paid in
U.S. dollars net of foreign currency exchange fees and expenses of the
Depositary and will be subject to Chilean withholding tax, currently imposed at
a rate of 35% (subject to credits in certain cases as described under
"Taxation"). See "Taxation--Chilean Tax Considerations".
A SIGNIFICANT CHANGE IN THE CHILEAN ECONOMIC LIBERALIZATION AND
DEREGULATION POLICIES COULD DISRUPT OUR BUSINESS AND CAUSE MATERIAL ADVERSE
EFFECTS.
We are subject to regulation by the Central Bank and the Superintendency of
Banks. During the Chilean financial crisis of 1982 and 1983, the Central Bank
and the Superintendency of Banks strictly controlled the funding, lending and
general business activities of the banking industry in Chile. See "Central Bank
Subordinated Debt" and "Chilean Regulation and Supervision".
Pursuant to an amendment to the Chilean General Banking Law enacted on
November 4, 1997, all Chilean banks may engage in additional businesses
depending on the strength of the bank and the approval by the Superintendency of
Banks of a feasibility study. Such businesses include offering commercial
banking services outside of Chile and providing factoring, underwriting,
transportation of securities, financial services, leasing, direct financial
advising services and securitisation products. See "Chilean Regulation and
Supervision--Other Businesses". The Chilean General Banking Law also applies a
modified version of the capital adequacy guidelines issued by the Basle
Committee on Banking Regulation and Supervisory Practices (the "Basle
Committee") to the Chilean banking system and limits the discretion of the
Superintendency of Banks to deny new banking licenses. There can be no assurance
that regulators will not in the future impose more restrictive limitations on
the activities of banks, including us, than those that are currently in effect.
Any such change could have a material adverse effect on our business, financial
condition and results of operations.
BECAUSE THE CHILEAN FINANCIAL SYSTEM HAS DIFFERENT CORPORATE DISCLOSURE AND
ACCOUNTING STANDARDS FROM THE U.S., OUR FINANCIAL STATEMENTS MAY NOT GIVE YOU
THE SAME INFORMATION AS FINANCIAL STATEMENTS PREPARED UNDER THE U.S. ACCOUNTING
RULES.
As a regulated financial institution, we are required to submit unaudited
unconsolidated balance sheets and income statements prepared in accordance with
Chilean GAAP to the Superintendency of Banks on a monthly basis. This
information is subsequently made public by the Superintendency of Banks within
approximately one month of
14
receipt. Such unaudited financial information is prepared in summary form, is
not sent directly to our shareholders and differs in other significant respects
from information generally available in the United States with respect to U.S.
financial institutions.
The securities laws of Chile, which govern open or publicly listed
companies such as us, impose disclosure requirements that are more limited than
those in the United States in certain important respects. In addition, although
Chilean law imposes restrictions on insider trading and price manipulation, the
Chilean securities markets are not as highly regulated and supervised as the
U.S. securities markets.
There are also important differences between Chilean and U.S. accounting
and financial reporting standards. As a result, Chilean financial statements and
reported earnings generally differ from those reported based on U.S. accounting
and reporting standards. See Note 28 to the Audited Consolidated Financial
Statements.
OUR BY-LAWS HAVE FEWER AND LESS WELL-DEFINED SHAREHOLDERS' RIGHTS AS
COMPARED TO THE BY-LAWS OF A U.S. CORPORATION.
Our corporate affairs are governed by our estatutos (the "By-laws"), which
function as our articles of incorporation and our by-laws, and by the laws of
Chile. See "Description of By-laws". Under such laws, our shareholders may have
fewer or less well-defined rights than they might have as shareholders of a
corporation incorporated in a U.S. jurisdiction. For example, under legislation
applicable to Chilean banks our shareholders would not be entitled to appraisal
rights in the event of a merger or other business combination undertaken by us.
See "Description of By-Laws--Shareholders' Meetings and Voting Rights".
Item 4. Information on the Company
A. History and Development of the Company
Banco Bilbao Vizcaya Argentaria
Banco Bilbao Vizcaya Argentaria S.A. ("BBVA") financial group resulted from
the merger between Banco Bilbao Vizcaya S.A. ("BBV") and Argentaria S.A.,
formerly a Spanish retail banking, asset management and insurance provider, that
took place in December, 1999. The merger was a strategic response to the
economic environment, where size is a fundamental competitive factor for
achieving sustainable gains. BBVA has over 27 million clients and a presence in
37 countries with 7,504 offices and approximately 93,093 employees throughout
the world.
BBVA is a global banking organization with a presence in the following
businesses: retail banking, wholesale banking, European banking, Latin American
banking, asset management and private banking, investment banking, industrial
group, insurance, and e-business, among others.
Our integration into the BBVA Group has provided us with tangible benefits
including the following: (i) sharing of technology; (ii) expanding range of
banking products and services that can better serve the Chilean market; (iii)
BBVA's global client relationships to serve those clients operating in Chile;
and (iv) broad financial support from a powerful shareholder whose investment in
us is both long-term and strategic.
The Acquisition
On September 24, 1998, BBVA (then BBV), obtained a 55% controlling stake in
us through: (i) the acquisition of 40,637,415 of our shares for an aggregate
price of Ch$20,821,157,368 (historical pesos) and (ii) the subscription of
158,034,393 of our newly-issued shares that were issued in accordance with the
shareholders' resolution passed at the Extraordinary Shareholders' Meeting held
on August 21, 1998. BBVA undertook these transactions in accordance with a
subscription and share purchase agreement, which had been entered into by BBVA
and the former principal shareholders on June 18, 1998. In addition, pursuant to
such agreement, BBVA and the former principal shareholders entered into a
separate agreement, which governs our future administration. The former
principal shareholders also entered into an agreement among themselves with
respect to our future administration.
15
See "Major Shareholders--Principal Shareholders". On March 25, 1999, our
shareholders voted to change our name from Banco BHIF to BBV Banco BHIF.
As a result of the merger between BBV and Argentaria that took place in
December 31, 1999, on May 17, 2000 our shareholders voted to change our name
from BBV Banco BHIF to BBVA Banco BHIF. On March 17, 2003, our shareholders
voted to change our name to Banco Bilbao Vizcaya Argentaria, Chile S.A.
Overview
Banco Bilbao Vizcaya Argentaria, Chile S.A. is a Chilean private commercial
bank incorporated on September 22, 1883 under Chilean General Banking Law. We
provide a wide range of financial products and services to the retail and
corporate banking markets throughout Chile. We are domiciled in Chile and our
principal executive office is located at Huerfanos 1234, Santiago, Chile. Our
telephone number is 56-2-679-1000. Our agent in the United States for U.S.
federal securities law purposes is the office of BBVA in New York, 1345 Avenue
of the Americas, 45th Floor, New York, NY 10105. BBVA's telephone number is
(212) 728-1660.
We conduct our business through our 78 full-service branches, two
limited-service branches, 64 pension payment centers and seven subsidiaries. Our
business activities are targeted principally at high, middle and lower-middle
income individuals and large, medium and small-size companies. At December 31,
2002, we had assets of Ch$3,196,204 million (US$4,487 million), total deposits
of Ch$1,912,485 million (US$2,685 million), and shareholders' equity of
Ch$257,022 million (US$360.8 million), including our net income for the year
ended December 31, 2002, which was Ch$20,255 million (US$28.4 million). This
resulted in a return on average shareholders' equity of 8.21% and a return on
average total assets of 0.71%. See "Key Information--Selected Financial Data".
Our retail banking business includes products such as residential mortgage
lending, the extension of other personal loans (including consumer loans),
automobile financing and credit cards, and services such as electronic banking,
custodial arrangements and foreign exchange transactions. Our corporate banking
business includes the extension of credit to small, medium and large-size
companies in the form of commercial loans, working capital lines of credit,
trade financing and other products and services such as payment services and
assistance to medium and small-size companies in connection with foreign trade
operations. This business is conducted through our Corporate and Business
Banking Divisions.
Through our branches and pension payment centers, we offer the
aforementioned products and services as well as payment and cash management
services to, and take deposits from, our customers. In addition, we make
electronic and phone banking services available to our customers on a 24-hour
basis. At December 31, 2002, we had 1,770 employees.
We, through our subsidiaries, BBVA BHIF Brokerage, BHIF Advisory, BHIF
Residential Housing Fund Manager, BBVA BHIF Residential Leasing, BHIF Closed End
Fund Manager, BBVA BHIF Mutual Fund Manager and BBVA BHIF Insurance Brokerage,
are becoming increasingly active in the Chilean financial leasing, securities
and insurance brokerage, financial advisory services, investment fund
management, residential housing fund management, residential leasing and mutual
fund markets. See "Business Overview--Lines of Business--Financial Services
Subsidiaries".
Under Chilean law, banks may conduct only those activities allowed by the
General Banking Law, which include, without limitation, lending, accepting
deposits and, subject to limitations, investing and providing financial
services. Investments are restricted to real estate for the bank's own use,
gold, foreign exchange and debt securities. Through subsidiaries, Chilean banks
may also engage in certain activities, such as securities brokerage services and
mutual fund management. Subject to certain limitations, Chilean banks may own
majority or minority interests in foreign banks. As a result of the amendment to
the General Banking Law passed by the Chilean Congress in December 1997, Chilean
banks are authorized in principle to conduct additional activities such as
factoring, underwriting, transportation of securities, financial services
(portfolio management), leasing and direct financial advisory services, and,
through subsidiaries, to engage in securitizations, brokerage of non-pension
fund insurance, loan collection, factoring, custody and transportation of
securities. Banks are required to conduct these activities in
16
accordance with general instructions of the Superintendency of Banks. The
activities that banks have engaged in after the referred amendment to the
General Banking Law have translated into increased competition in those areas,
with subsidiaries of Chilean banks gradually becoming more important players. In
1998, we acquired a majority stake at an insurance brokerage company, Corredora
Tecnica de Seguros, and began to offer non-pension fund insurance brokerage
services through our branch network. In June 1999, we absorbed our leasing
subsidiary and integrated her leasing operations with ours. In 2000 we acquired
the remaining stake at Corredora Tecnica de Seguros.
B. Business Overview
General
The Chilean economy has grown at a compound average rate of 5.5% per annum
during the years 1992 through 2002 and at a compound average rate of 2.4% per
annum during the years 1998 through 2002. Inflation for the year 2002 reached
2.8%, within the official target range of 2%-4% for the year. The rate of
investment has decreased from 26.9% of Chile's gross domestic product in 1998 to
22.7% of gross domestic product in 2002. The growth of the economy has generated
a demand for financial services from an increasing number of individuals in all
income segments of the population and from an increasing number of companies,
although at a slower pace over the last few years due to the current economic
environment. Our business strategy has shifted to target the growing demand for
banking products and services from upper to lower-middle income individuals and
from large corporations to small-size companies. Our strategy aims to increase
lending and to provide services through cross-selling to all customer segments.
Our historical strength in residential mortgages and with medium and small-size
companies serves as a natural and strong base for expansion in those markets.
While we believe that this strategy has the potential to provide higher net
interest margins, it also has the potential to expose us to a higher degree of
credit risk. We continuously seek to improve the quality of our loan portfolio
and our risk index through the adherence to our new loan origination procedures
and credit management policies.
The Chilean market is highly competitive. We intend to maximize our
competitiveness by offering new and more sophisticated products and
higher-quality services to our actual and potential clients through our branch
network and through modern electronic and home-banking facilities. With that
objective, beginning in 1993 we undertook an investment and modernization
program aimed at improving our operating efficiency and expanding the scope and
variety of products and services offered to our customers. We reformulated this
program in 1999 and in furtherance thereof we opened 20 full-service branches in
1999, 6 more in the year 2000, one branch in the year 2001, and none in the year
2002, waiting for an improvement in the economic environment. We continue to
renovate our existing branches and maintain state-of-the-art electronic and home
banking facilities, and we will resume a moderate expansion plan of opening a
few branches in 2003 and 2004.
Our strategy in respect of our net interest margin is to continue our
policies designed to attract demand deposits as a less expensive source of
funding, while promoting all products oriented towards all market segments. We
will also continue to promote our fee-generating products, emphasizing the
cross-selling of our subsidiaries' products and services to our clients.
Retail Market
Management believes that our future growth in the retail market will derive
from our ability to serve a larger customer base and to increase the
cross-selling of our products and services to our customers. Our present
strategy for the retail market is to target upper to lower-middle income
individuals, which represent approximately 70% of the population Through our
consumer lending division, we have been able to capture a growing portion of the
demand for consumer credit from middle and upper-middle income individuals who
previously did not resort to credit or borrowed from our bank. See "--Lines of
Business--Retail Banking Division". We also conduct promotional campaigns
designed to enhance our image and target new customers. We launched a new
consumer loan product El Crediton(R) , aimed at attracting customers from the
upper income brackets due to its special attributes, such as receiving up to 15%
of the interest paid as a reward for good payment history. The product was
successful, and was the main driver behind our 14.8% growth in consumer loans
during 2002.
17
We will continue to build on our marketing concept of BHIFamilia(R), which
promotes a variety of special packages of banking products designed to appeal to
various segments of the retail market. We conducted a promotional campaign aimed
at positioning our new image as Banco Bilbao Vizcaya Argentaria, Chile S.A., a
member of the BBVA Group. In 1999, we launched a new residential mortgage loan
product El Hipotecon(R), aimed at attracting customers from the middle to upper
income brackets. El Hipotecon(R) loans start at a higher loan amount than
traditional mortgage loans and has some unique attributes like a variable
interest rate with a cap at 8.5%, and it includes incentives for obtaining the
loan as part of a package including a current account and a credit card. This
product has been successful, bringing our self-financed mortgage loans
(classified under "commercial loans") up by 30.9% in 2002 (See "--Loan
Portfolio"). We intend to continue to capitalize on the strength of our
residential mortgage lending business and promote the cross-selling of our other
retail products to our residential mortgage customers, who totaled approximately
35,950 at December 31, 2002.
In the first quarter of the year 2000, we launched our Cuenta 7(R)
campaign, aimed at increasing our checking accounts, particularly amongst upper
to upper middle income clients. During that year, we also increased the range
and scope of the Mutual Funds it offers its clients, with success.
In order to improve our capacity to serve a larger customer base, we plan
to extend our network of electronic and home banking facilities to a larger
geographic area. See "--Branch Network and Electronic Banking". We have adopted
and will continue to implement credit approval and management and review
policies designed to improve steadily the quality of our retail loan portfolio.
We also seek to increase cross-selling, to improve our net interest margin by
increasing non-interest bearing checking account deposits and other deposits as
a source of funding, and to increase the volume of higher interest rate loans to
lower-middle income individuals.
Corporate Market: Small and Medium-Size Companies and Large (Corporate)
Companies
We principally target two distinct segments in the corporate banking
market--small and medium-size companies and large (corporate) companies--and
have developed specific strategies and customized products for each segment.
These segments are served by two specialized divisions, our Business Banking
Division and our Corporate Banking Division, respectively. As a consequence of
this change, since 2001 we have changed our "Lines of Business" report to better
reflect this structure and, therefore, we no longer report our Construction and
Infrastructure Financing business as a separate line of business but included it
in our Corporate Banking Division.
In Chile, a smaller company will tend to rely on a limited number of banks
(generally two or three) and these banks are frequently banks with which the
company's managers have had personal banking relationships. Smaller companies
also consider criteria such as proximity, efficiency and image in their
selection of banks. Accordingly, we seek to continue to take advantage of our
customer base in the retail market to promote our business with small companies.
In addition, we will continue developing standardized products particularly
suited to the needs of this segment of the market, such as Trade Point(R), a
facility developed to assist small-size companies with their foreign trade
transactions. In the large company segment of the market, we seek to expand our
customer base, particularly in sectors of the economy with strong potential for
growth such as consumer product retailers, mining, construction, fisheries,
automobile distribution, and telecommunications.
Through the continued implementation of our investment and modernization
program, we seek to enhance our ability to provide electronic banking and
related services to our corporate customers. Benefiting from our increased
capital base, the strength of the BBVA Group and the expanded range of products
and services that we can provide overseas as a member of the BBVA Group, we are
aiming to expand our corporate client base. We will also continue our efforts to
attract deposits, particularly from medium and small-size companies, as a means
of broadening our funding base and controlling our funding costs.
Lines of Business
The following tables provide daily average unconsolidated information as to
our retail and corporate banking business for the months of December 2000, 2001
and 2002.
18
Average daily balances for the month of December 2000
----------------------------------------------------------
Percentage of Percentage of
Outstanding Total Loans Past Due Total Past Due
----------- ----------- -------- --------------
(in millions of constant Ch$ of December 31, 2002,
except for percentages)
Retail banking division
Residential mortgage lending................ 376,879 23.3% 4,053 12.8%
Consumer lending............................ 172,191 10.7 1,888 6.0
Subtotal............................... 549,070 34.0 5,941 18.8
Business banking division 409,508 25.4 21,601 68.5
Corporate banking division 656,242 40.6 4,015 12.7
--------- ----- ------ -----
Total.................................. 1,614,820 100.0% 31,557 100.0%
========= ===== ======
Average daily balances for the month of December 2001
----------------------------------------------------------
Percentage of Percentage of
Outstanding Total Loans Past Due Total Past Due
----------- ----------- -------- --------------
(in millions of constant Ch$ of December 31, 2002,
except for percentages)
Retail banking division
Residential mortgage lending................ 389,271 21.9% 3,999 10.0%
Consumer lending............................ 198,640 11.2 2,228 5.6
Subtotal............................... 587,911 33.1 6,227 15.6
Business banking division 459,263 25.8 30,131 75.6
Corporate banking division 731,577 41.1 3,494 8.8
--------- ----- ------ -----
Total.................................. 1,778,751 100.0% 39,852 100.0%
========= ===== ======
Average daily balances for the month of December 2002
----------------------------------------------------------
Percentage of Percentage of
Outstanding Total Loans Past Due Total Past Due
----------- ----------- -------- --------------
(in millions of constant Ch$ of December 31, 2002,
except for percentages)
Retail banking division
Residential mortgage lending................ 447,347 22.9% 4,138 10.1%
Consumer lending............................ 221,951 11.3% 1,870 4.6%
Subtotal............................... 669,298 34.2% 6,008 14.7%
Business banking division 564,460 28.9% 33,027 80.7%
Corporate banking division 722,262 36.9% 1,866 4.6%
--------- ----- ------ -----
Total.................................. 1,956,020 100.0% 40,901 100.0%
========= ===== ====== =====
Retail Banking Division
For the month of December 2002, we had a daily average of Ch$669,298
million (US$940 million) in retail loans outstanding, accounting for 34.2% of
the average daily balance of our total loan portfolio for such month.
Approximately 0.9% of our daily average of retail loans outstanding for the
month of December 2002 were past due, accounting for 14.7% of the average daily
balance of all past due loans for such month, and the risk index for retail
loans was 1.37%.
We offer our products and services to all segments of the Chilean
population through BBVA Chile and have organized our retail banking division to
satisfy the demands of these segments. Our personal banking offers customers a
diversified range of products, including residential mortgage loans, other
personal loans (including consumer loans), automobile financing and credit
cards, and services such as electronic banking, custodial arrangements and
foreign exchange transactions. Building on our residential mortgage loan
business, since 1992 we have steadily expanded the scope of our activities to
offer innovative as well as traditional products to our retail customer base.
Residential Mortgage Lending. For the month of December 2002, we had a
daily average of Ch$447,347 million (US$628 million) in residential mortgage
loans outstanding, accounting for 22.9% of the average daily balance of our
total loan portfolio for such month. For the month of December 2002, our daily
average of past due residential mortgage loans totaled Ch$4,138 million (US$6
million), accounting for 10.1% of the average daily balance of our total past
due loans, and the risk index for residential mortgage loans was 0.70%.
At December 31, 2002, we were the fourth largest private bank in Chile in
terms of residential mortgage loans and accounted for 6.9% of the residential
mortgage loans in the Chilean banking system and 8.7% of such loans made by the
Chilean privately-owned banks, based on information prepared by the
Superintendency of Banks.
19
Mortgage lending is our oldest and most developed retail business. Our
portfolio of 35,950 residential mortgage loans at December 31, 2002, which
amortize on a monthly basis, represents our widest and strongest credit
relationships with retail customers. For this reason, our mortgage lending
business continues to play a significant role as part of our strategy of
cross-selling our products to the retail market. At December 31, 2002,
approximately 17% of our residential mortgage customers had consumer loans with
us.
Our residential mortgage loans are denominated in UF, bear interest at a
fixed rate (which is at a spread above the cost of funding) and have maturities
between five and 30 years, with a weighted average life of approximately 19
years at December 31, 2002. We fund an important proportion of our residential
mortgage loans and certain of our commercial mortgage loans through the issuance
of UF-denominated notes ("Mortgage Finance Bonds") which enable us to limit our
exposure to interest rate fluctuations and inflation.
Consumer Lending. For the month of December 2002, we had a daily average of
Ch$221,951 million (US$312 million) outstanding in retail loans (other than
residential mortgage loans), accounting for 11.3% of the average daily balance
of our total loan portfolio for such month. Our average daily balance for the
month of December 2002 of past due retail loans (other than residential mortgage
loans) totaled Ch$1,870 million (US$3 million), accounting for 4.6% of the
average daily balance of total past due loans for such month, and the risk index
for such loans was 2.85%. Our retail loans (other than residential mortgage
loans) included personal loans (such as consumer loans), automobile financing
and credit cards.
Consumer Lending - Personal Loans. For the month of December 2002, we had
an average daily balance of approximately Ch$206,163 million (US$289.4 million)
in personal loans outstanding, accounting for 10.5% of the average daily balance
of our total loan portfolio and 92.9% of the aggregate amount of our retail
loans for such month. The risk index for personal loans was 2.80% at such date.
Our personal lending business targets middle and upper income individuals.
Personal lending on a short to medium-term basis involves loans and overdraft
facilities. We offer our personal lending products through our branches to our
existing customers (mainly holders of checking accounts). In response to the
increasing demand for small consumer loans from the lower-middle income segment
of the Chilean population as the Chilean economy has expanded during the past
decade, most Chilean private banks have established separate consumer loan
divisions. Unlike certain other Chilean banks which have their consumer credit
divisions operating out of premises physically separate from their full-service
branches and under a different name, our Consumer Credit division operates
through all of our full-service branches.
Consumer Lending - Automobile Loans. We offer special retail credit lines
to finance partially or, in the case of selected customers, up to 100% of the
purchase price of automobiles. For the month of December 2002, we had a daily
average balance of approximately Ch$7,862 million (US$11.0 million) in
automobile loans outstanding, representing 3.44% of our average daily balance of
total retail loans for such month and 0.4% of our average daily balance of total
loans outstanding for such month. For the month of December 2002, our daily
average of past due automobile loans totaled Ch$9 million (US$10,000),
accounting for 0.0% of our average daily balance of total past due loans for
such month, and the risk index for such loans was 10.42%. Automobile loans have
maturities that range from six months to four years, are denominated in Chilean
pesos, accrue interest on a fixed rate basis and are payable monthly. We
generally require that the automobile purchased with the proceeds of the loan be
pledged as collateral, together with the purchaser's rights to proceeds under
the applicable insurance policy.
Consumer Lending - Credit Cards. For the month of December 2002, we had a
daily average of Ch$7,926 million (US$11.1 million) credit card balances
outstanding, accounting for 0.4% of the average daily balance of its total loan
portfolio for such month. Our average daily balance for the month of December
2002 of past due credit card balances was Ch$242 million (US$0.34 million),
accounting for 0.6% of our average daily balance of total past due loans for
such month. The risk index for credit card balances was 3.53%. We issue BBVA
Chile credit cards to our customers under the Visa trademark pursuant to an
agreement with Visa, the largest credit company in Chile. In addition, we issue
affinity cards also under the Visa trademark pursuant to agreements with the
Chilean lawyers' association, the Chilean medical association, the Chilean
teachers' association and the Chilean engineers'
20
association. BBVA Chile credit cards are issued for personal and corporate use
and they allow customers access to national and international credit. As of
December 31, 2002, we had 62,799 active Visa credit cards.
We process our credit cards through Nexus S.A., a credit card processing
facility owned by 8 Chilean banks in which we had a 9.7% interest at December
31, 2002. Our management believes that acceptance of credit cards as a means of
payment for goods and services in Chile will increase in the future as it has
over the past five years. Accordingly, we will continue to promote the use of
our credit cards. Our revenues arising from our credit card business take the
form of commissions charged to merchants and annual fees, commissions and
interest charged to cardholders on their balances.
Consumer Lending - Credit Approval Process. In reviewing credit
applications, our policy is to verify that a series of quantitative and
qualitative parameters are met. We have developed a credit scoring system which
allows loan officers to classify applicants on the basis of their income,
overall level of indebtedness, liquidity and assets, as well as on qualitative
factors such as the applicant's educational, professional and financial
background. We obtain credit information on each applicant from DICOM S.A.
("DICOM"), which provides a broad and updated nationwide credit database that we
can readily access. Our evaluation of loan applications is centralized and based
on information obtained by loan sales managers. In the credit analysis, emphasis
is placed on different factors, depending upon the credit requested and whether
the applicant is an existing customer of BBVA Chile, among other considerations.
See "Selected Statistical Information--Credit Approval Process". We consider our
credit approval policies in respect of retail loans generally comparable to
those of other Chilean private banks and stricter than those of the finance
company.
After credit is extended, we monitor the credit quality of the debtor and
reclassify a debtor loan on the basis of our scoring system based on the our
appraisal of changes in such debtor's ability to meet the qualitative and
quantitative parameters described above. In addition, our general policy is to
initiate legal collection proceedings on any retail loan as promptly as possible
upon such loan becoming overdue and to charge off the entire consumer loan four
months after any payment of principal or interest is overdue, which is earlier
than the six months allowed by the regulations of the Superintendency of Banks.
See "--Chilean Regulation and Supervision--Loan Loss Reserves".
Corporate Banking
Relying on a team of account managers and through specialized branch
offices, we provide a full range of financial products and services to small,
medium and large-size companies in Chile through BBVA Chile and its
subsidiaries, including commercial loans, working capital lines of credit, trade
financing, payment services and short-term and other deposits.
For the month of December 2002, BBVA Chile had a daily average of
Ch$1,286,722 million (US$1,806 million) of outstanding corporate loans,
accounting for 65.8% of the average daily balance of BBVA Chile's total loan
portfolio for such month. BBVA Chile's daily average of past due corporate loans
for the month of December 2002 totaled Ch$34,893 million (US$49.0 million),
accounting for 85.3% of our average daily balance of total past due loans for
such month, and the risk index for such loans was 1.79%.
Business Banking Division. Within BBVA Chile's corporate banking business,
companies with annual sales between US$750,000 and US$20 million are considered
medium and small-size companies. Loans to such companies, which are made through
our personal banking branches as well as through our specialized commercial
banking branches, totaled a monthly average of Ch$564,460 million (US$792
million) in December 2002 and accounted for 28.9% of BBVA Chile's total loan
portfolio. As a result of the predominance of loans to small and medium-size
companies within Banco Nacional's loan portfolio, following the merger with
Banco Nacional in 1989, BBVA Chile became a significant source of credit for
such companies in Chile and had approximately 14,874 such customers at December
31, 2002. Our strategy in this market is to continue targeting medium and
small-size companies that operate in the sectors of the Chilean economy with the
highest growth potential, such as mining, construction, automobiles, trade,
telecommunications and other services. Small and medium-size companies tend to
rely on two or three banks to cover their financing requirements, principally
for the acquisition of capital goods, foreign trade and working capital.
21
We also lend to small businesses (companies with annual sales of less than
US$750,000), providing loans and other services specifically designed for such
businesses. In this segment of the market, we employ credit approval policies
largely based on the verification of objective conditions and generally requires
collateral at least equal to 90% of the value of its loans.
Through our foreign trade business, we provide our banking customers with a
wide range of products and services designed to facilitate their export and
import transactions, including issuing, confirming and negotiating letters of
credit, extending credit lines for pre-export/import financing from foreign
banks, fund transfers and foreign exchange transactions. In this connection, we
developed the Trade Point(R) facility to assist small and medium-size companies
with their foreign trade transactions. Trade Point(R) was successful in
attracting business from midsize companies with foreign trade business. See
"--Business Overview--Corporate Market: Small and Medium-Size Companies and
Large (corporate) Companies".
Corporate Banking Division. Large (corporate) firms are a segment of the
market that has become increasingly competitive in recent years, largely due to
the internationalization of the financial markets and the growth in the capital
base of Chilean institutional investors. As a result, domestic lenders have
generally experienced narrowing spreads and a decrease in the profit margins
generated by loans to large corporate borrowers (companies with annual sales
greater than US$20 million). In an effort to increase its profits in this
important segment of the corporate market, BBVA Chile continues to explore
business opportunities with large corporate borrowers, seeking to offer products
that are subject to less competitive pressure such as payment services and other
tailored services, and to leverage on the capability of the Bank to provide
world wide services through the network of banks that form part of the BBVA
Group. Loans to other corporate borrowers, mostly large companies, totaled a
daily average of Ch$722,262 million (US$1,014 million) for the month of December
2002 and accounted for 36.9% of the daily average of our loan portfolio in such
month.
Our cross-border loans are principally trade-related. These include credit
lines to foreign financial institutions, some of them under the ALADI
(Asociacion Latinoamericana de Integracion, "ALADI" or "Latin American
Association for Integration") payment system. ALADI is a series of arrangements
among Latin American countries designed to facilitate trade financing by
providing to a cross-border lender in a participating country the guarantee of
its own central bank of amounts due in connection with a qualifying transaction.
At December 31, 2002, our cross-border lending was US$123.5 million, of which
approximately 0.03% was under the ALADI program and, accordingly, was guaranteed
by the Central Bank. Loans to Brazilian borrowers at December 31, 2002, amounted
to Ch$26,749 million (US$37.5 million), approximately 30.4% of our loan
portfolio at that date. None of the loans to Brazilian borrowers was under the
ALADI program.
BBVA Chile offers payment services and cash management services to its
corporate banking customers. BBVA Chile is a party to a number of payment
service contracts with large and medium-size companies. Under those contracts,
in exchange for a fee BBVA Chile allows customers, through a secure Internet
connection, to manage their accounts and make payments to suppliers, pension
funds and employees, avoiding administrative costs. BBVA Chile believes that
payment and cash management service contracts provide it with a low-cost, stable
deposit base and the opportunity to cross-sell its products.
Credit Approval Process. BBVA Chile's credit approval policy in respect of
medium and small-size companies is defined mainly by certain quantitative
parameters such as the applicant's debt servicing capacity, net worth, leverage,
results of operations and reputation among financial institutions. In addition,
loan officers are required to prepare a file containing information regarding
the applying company's track record and prospects, as well as projections for
the economic sector in which it operates. The information is transmitted to BBVA
Chile's principal executive offices, where the corporate banking division
operates and decisions regarding corporate credit are made. In the case of large
companies, the credit analysis focuses on the applicant's financial condition as
well as an evaluation of developments and projections relating to the
applicant's market. In addition, we monitor the borrower's financial condition
and results of operations while the loan is outstanding, including the use of
reports prepared by DICOM, and seek to maintain contact with our customers so as
to anticipate developments that could impact adversely the customer's repayment
capacity. See "Selected Statistical Information--Allowance for Loan Losses".
22
Deposits and Pension Payment Services
Deposits. Time deposits are denominated in Chilean pesos, UF and dollars
and generally bear interest at a fixed rate. Checking accounts are
peso-denominated, non-interest bearing accounts, and savings accounts are
UF-denominated and generally bear interest at a relatively low floating rate. At
December 31, 2002, BBVA Chile's deposit balances amounted to Ch$1,397,036
million (US$1,961 million) and accounted for 73% of our total liabilities at
that date.
Total Deposits
(as of December 31,
2002) % of Total Deposits
-------------------- -------------------
(in millions of constant Ch$ of
December 31, 2002, except for percentages)
Product
- ------------------------------------------------------------------
Time deposits..................................................... 1,397,036 73.05%
Checking accounts................................................. 224,790 11.75%
Bankers demand drafts and other deposits.......................... 233,011 12.18%
Savings........................................................... 57,648 3.01%
--------- -------
1,912,485 100.00%
========= ======
Our strategy in the retail market is to attract deposits from a large
number of individuals as a means of maintaining a relatively stable and
cost-effective source of funding. As part of this strategy, BBVA Chile has
developed a variety of deposit accounts designed to appeal to the various
segments of the retail market. We conduct promotional campaigns aimed at these
specific segments, which have rendered satisfactory results. These accounts
include BHIFamilia Mujer(R) (BHIFamily for Women), BHIFamilia Profesional
Joven(R) (BHIFamily for Young Professionals) and Ahorro Infantil (Child
Savings). In 2000, we launched our Cuenta 7(R) campaign, aimed at increasing our
checking accounts, particularly amongst upper to upper middle income clients. In
2001, with the help of the improved systems platform, we launched the Cuenta
Libreton (R), a savings account associated with a checking acount that enabled
our clients to optimize their checking account balances by keeping their money
in the associated savings account and receive interest on them. Such product
revived a national discussion on the convenience of allowing banks to pay
interest on checking accounts balances, and resulted in a change in regulations
that allowed banks to do that. After the new regulation became effective, we
relaunched the Cuenta Libreton (R) as a remuneratory checking account, with
limited success since the interest rate environment made it difficult to offer
an attractive interest on those balances. The same happened to all banks who
offer a remuneratory checking account.
Pension Payment Services. Since 1992 we have been party to a payment
service contract with the INP, an agency of the Ministry of Labor, providing
monthly pension payments to approximately 750,000 of Chile's 1.5 million
pensioners (the "INP Contract"). Under the INP Contract - which expires in 2003
with an option to continue for another two years - we receive pension funds from
the INP and are required to pay such funds to the pensioners shortly thereafter.
We are paid a fee for this service, which depends on the amounts held by the INP
with us on its current accounts. This fees are liquidated and entered on a
monthly basis ( See "Operating and Financial Review and Prospects -- Operating
results----Income from services, net"). This arrangement allows us to have
access to an important non-interest bearing source of funds.
The majority of our payments to pensioners are made through our 64
special-service pension payment centers exclusively engaged in providing
services under the INP Contract. Payments are also made by mail, through
independent contractors in rural areas or by direct deposit. For the year ended
December 31, 2002, average daily amounts on deposit with us in connection with
the INP Contract totaled Ch$36,000 million and represented approximately 2.1% of
our average daily outstanding demand deposits and savings accounts, or
approximately 1.7% of average total deposits daily, as a result of the
advantages of the INP contract.
BBVA Chile has capitalized on the experience gained under the INP Contract
and developed systems to provide payment services to pension funds,
beneficiaries of insurance companies and pensioners under the privately run
social security system.
23
Branch Network and Electronic Banking
We had a network of 78 full-service branches, 2 limited-service branches
and 64 pension payment centers at December 31, 2002.
Our full-service branches accept deposits, disburse cash, offer the full
range of our retail banking products such as residential mortgages, consumer
loans, automobile financing and credit cards, open checking accounts, lend to
small and medium-size companies, offer leasing, securities brokerage and housing
fund management services and provide information to customers and potential
customers. Our limited-service branches are equipped to take deposits and to
offer payment services. The role of our special-service payment centers is to
provide check cashing and cash disbursement services to Chilean pensioners
pursuant to the INP Contract. See "--Lines of Business--Deposits and Pension
Payment Services".
We are expanding our geographic penetration to be in a position to readily
provide our customers throughout the country our wide range of products and
services. The financing needs of companies located in regions of Chile outside
the Santiago area have increased as a result of gradual changes affecting the
Chilean economy. Corporate clients with operations throughout Chile need banking
services in all of Chile's regions. As the Chilean middle class has grown,
demand for consumer banking services has also increased. See "--Lines of
Business--Retail Banking". In addition to increasing the number of our branches,
we are constantly investing in telecommunication and computer equipment, so as
to offer customers up-to-date electronic and home-banking facilities. We believe
this expansion has been instrumental in supporting the outstanding growth
achieved by the bank in the past two years.
We offer electronic banking services to our customers. BBVA Chile has made
arrangements for its individual customers to have access to the REDBANC system
with their BHIF Global or Visa cards. The REDBANC system was recently integrated
with the BancoEstado network to conform a network of ATMs at nearly 3,500
locations throughout Chile at December 31, 2002. Such access allows customers
holding a checking or savings account or a BHIF Visa card to obtain balance and
account related information, withdraw cash and make payments. At December 31,
2002, BBVA Chile had 277,225 active BHIF labeled cards, all of which provide
access to the REDBANC system. At December 31, 2001, we had 284,011 active BHIF
labeled cards.
In addition, through Fono BHIF, we offer a 24-hour phone-banking service to
our customers that grant them access to account information and allows them to
effect fund transfers and certain payments. BBVA Chile was the first Chilean
bank to offer this service on a toll-free basis in all cities served by the
Compania de Telecomunicaciones de Chile. We have been providing certain
information and limited transaction services through the Internet since June
1996, and such services have been fully available since October 1996. In October
1997, we expanded our Internet services by adding new services providing
customers with financial information and the ability to perform transactions.
During the month of December 2002, 433,789 inquiries and transactions were made
through the Internet.
BBVA Chile, in conjunction with a number of other Chilean banks, is a
shareholder of Transbank S.A., a corporation that carries out the electronic
transfer services which are necessary for our business and provides support to
our shareholders' operations, through the installation, operation, maintenance
and development of equipment and systems for the automatic and electronic
transfer of funds. The availability of this transfer capability has facilitated
our ability to serve our customers efficiently.
Financial Services Subsidiaries
Chilean banks may conduct only those activities allowed by the General
Banking Law. Chilean banks were historically prohibited from providing services
other than traditional banking activities. However, in 1986 banks were permitted
to offer, through subsidiaries, services deemed to be complementary to
commercial banking activities. Furthermore, as a result of the amendment to the
General Banking Law passed by the Chilean Congress in December 1997, Chilean
banks are authorized in principle to conduct additional activities such as
factoring, underwriting, transportation of securities, financial services
(portfolio management), leasing and direct financial advisory services, and,
through subsidiaries, to engage in securitizations, brokerage of non-pension
fund insurance,
24
loan collection, factoring and custody and transportation of securities. In
1998, we acquired 80% of a non-pension fund insurance brokerage and in 2000
acquired the remaining 20%.
In an effort to confront the growing trend towards financial
disintermediation, broaden the scope of products and services offered to
customers and increase its fee income, we have established subsidiaries that
operate in various financial markets. Our business strategy, particularly with
respect to our corporate customers, is to increase the cross-selling of the
products and services offered by the subsidiaries, which are made available at
BBVA Chile's full-service branches. See "--Business Strategy".
As approved by the Superintendency of Banks on July 1, 1999, we acquired
0.01% minority interest in BHIF Leasing S.A., resulting in the dissolution of
the latter. As of December 31, 2000, the net assets of BHIF Leasing S.A. were
absorbed by us.
The following table sets forth information with respect to BBVA Chile's
financial services subsidiaries at December 31, 2002:
Shareholders' Ownership
Assets Equity Net Income Interest
------ ------------- ------------ ---------
Twelve-month
period ended
At December At December December 31, At December
Company 31, 2002 31, 2002 2002 31, 2002
- ------------------------------------------------ ----------- ----------- ------------ -----------
(in millions of constant Ch$ of December 31, 2002, respectively,
except for percentages)
BBVA BHIF Brokerage............................. 108,958.0 8,513.4 1,449.4 100.00
BHIF Advisory................................... 1,124.2 1,050.1 372.0 98.60
BHIF Closed-end Fund Manager.................... 1,480.2 1,482.7 11.4 100.00
BHIF Residential Housing Fund Management........ 315.1 652.6 23.9 100.00
BBVA BHIF Residential Leasing................... 6,620.4 3,917.4 1,141.8 97.48
BBVA BHIF Mutual Fund .......................... 5,880.8 5,576.1 1,425.2 100.00
BBVA BHIF Insurance Brokerage................... 3,174.7 2,632.7 1,055.8 100.00
--------- -------- -------
Total........................................ 127,553.4 23,825.0 5,479.5
========= ======== =======
Securities Brokerage Services
BBVA BHIF Brokerage, which has operated since 1988, is registered with the
Superintendencia de Valores y Seguros (the "Superintendency of Securities and
Insurance") as a securities broker, and is a member of the Santiago Stock
Exchange and of the Electronic Stock Exchange. In 1997, we acquired 29.6% of the
ownership of BBVA BHIF Brokerage, increasing our ownership level to 100.0%. In
connection with this acquisition, we changed BBVA BHIF Brokerage's name from
"BHIF - Transvalores" to "BHIF Corredora de Bolsa". According to information
released by the Santiago Stock Exchange, business transacted by BHIF Brokerage
as a stockbroker during 2002 totaled approximately Ch$2,011,441 million, and
accounted for approximately 14.12% of the market. For the year ended December
31, 2002, BBVA BHIF Brokerage recorded net income of Ch$1,449.4 million (US$2.0
million). After a reorganization at the end of 1996, BBVA BHIF Brokerage is
consolidating its position in the markets where it currently operates and
enhancing its access to the domestic markets by utilizing our distribution
networks. Our policy is to capitalize 100% of any profits generated by BBVA BHIF
Brokerage to increase its capital base. This subsidiary offers our high income
individual and corporate clients a wide range of services, acting as an entity
complementary to us. BBVA BHIF Brokerage operates actively in the different
markets, including equity, variable and fixed income (debt instruments) and the
trading of foreign currency.
Financial Advisory Services
BHIF Advisory, a 98.6%-owned subsidiary of BBVA Chile, was established by
us in 1987. The subsidiary adopted its current name in 1992 and focuses on
providing consulting and advisory services, mainly to our customers. Such
services include debt restructuring, asset and company valuations, debt and
equity offerings and
25
syndication of loans, among other activities. For the year ended December 31,
2002, BHIF Advisory recorded a net income of Ch$372 million (US$0.5 million).
Closed-end Fund Management
BHIF Closed-end Fund Manager, a 100%-owned subsidiary of BBVA Chile, was
established in 1995 to conduct our investment fund management business. BHIF
Closed-end Fund Manager attracts investments from institutional investors which
are managed through two separate closed-end funds: BHIF Equity and BHIF Real
Estate. BHIF Equity invests in a diversified equity portfolio (including venture
capital arrangements) of both established companies and start-up companies in
growing sectors of the economy. BHIF Real Estate invests in an equity portfolio
with new and established companies conducting real estate related businesses.
For the year ended December 31, 2002, BHIF Closed-end Fund Manager recorded a
net income of Ch$11.4 million (US$16,000). In 1997, BHIF Closed-end Fund Manager
reached important strategic agreements with Vontobel Fund Managers to manage
Chilean resources abroad, with Bear Stearns as the operator. In addition, BHIF
Closed-end Fund Manager reached an agreement with Banco do Spirito Santo,
Portugal, to manage foreign capital in Chile. A law passed in 1997 allows BHIF
Closed-end Fund to invest part of the funds' capital outside of Chile.
Residential Housing Fund Management
In 1995, we obtained authorization from the Superintendency of Banks and
the Superintendency of Securities and Insurance to establish BHIF Residential
Housing Fund Management to participate in the market for the financing of
residential housing through leasing schemes. BHIF Residential Housing Fund
Management, a 100.0% owned subsidiary of BBVA Chile, was established and began
operations in February 1996. For the year ended December 31, 2002, BHIF
Residential Housing Fund Management recorded net income of Ch$23.9 million
(US$33,550). As of December 31, 2002, the funds managed by this subsidiary
totaled Ch$3,000 million, generating Ch$123.6 million in fees and commissions.
Residential Leasing
In 1996, we obtained authorization from the Superintendency of Banks and
the Superintendency of Securities and Insurance to establish BBVA BHIF
Residential Leasing to participate in the market for the management of funds
applied to the financing of residential housing. BBVA BHIF Residential Leasing,
a 97.48%-owned subsidiary of BBVA Chile, was established and began operations in
October 1996. BBVA BHIF Residential Leasing is the leading firm in the
residential leasing industry, owning Ch$4,019 million in leasing contracts as of
December 2002. For the year ended December 31, 2002, BBVA BHIF Residential
Leasing recorded a net income of Ch$1,141.8 million (US$1.6 million).
Mutual Fund
In February 1997, we obtained authorization from the Superintendency of
Banks and the Superintendency of Securities and Insurance to establish BBVA BHIF
Mutual Fund, which commenced operations in March 1997. For the year ended
December 31, 2002, BBVA BHIF Mutual Fund recorded net income of Ch$1,425.2
million (US$2.0 million).
Insurance Brokerage
Our Board of Directors, in an Extraordinary Session held on September 4,
1998, agreed to purchase 80% of the rights of Corredora Tecnica de Seguros
Limitada, an insurance brokerage firm, for approximately US$5.5 million. On
September, 2000, we agreed to purchase the remaining 20% of the rights of
Corredora Tecnica de Seguros Limitada, for approximately US$1.4 million. The
acquisition had been authorized by the Superintendency of Banks on August 24,
1998. For the year ended December 31, 2002, BBVA BHIF Insurance Brokerage
recorded a net income of Ch$1,055.8 million (US$1.5 million).
26
COMPETITION
Overview
The Chilean financial system is comprised of 26 private-sector banks (of
which 16 are banks established in Chile and 9 are subsidiaries of banks
established abroad, and one public-sector bank (BancoEstado). At December 31,
2002, the Chilean financial system had a total of Ch$31,674,779 million
(US$44,463 million) of loans outstanding. In the last five years, the average
annual rate of increase in outstanding loans for the Chilean financial system
was 3.6% (compared with an average annual rate of increase in GDP of 2.1% during
the same period) and the average annual return on average shareholders' equity
was 13.1%.
The following table provides certain statistics on the Chilean banking
system at December 31, 2002:
Assets Loans Deposits Shareholders' Equity
---------------------- ------------------- --------------------- --------------------
Amount Share Amount Share Amount Share Amount Share
----------- ----- ---------- ----- ----------- ----- ----------- -----
Ch$ Million % Ch$ Million % Ch$ Million % Ch$ Million %
----------- ----- ---------- ----- ----------- ----- ----------- -----
Banco del Estado 6,587,881 14.1 4,055,309 12.8 4,093,343 14.6 352,611 9.8
Banks established in Chile 35,870,479 76.8 25,477,723 80.4 21,137,058 75.5 2,705,770 75.3
Subsidiaries of banks
established abroad 4,051,903 8.7 1,994,737 6.3 2,637,565 9.4 511,013 14.2
Private sector total 39,922,382 85.5 27,472,460 86.7 23,774,623 84.9 3,216,783 89.5
Total banks 46,510,607 99.6 31,527,769 99.5 27,867,967 99.5 3,569,394 99.3
Finance company 166,944 0.4 147,010 0.5 135,278 0.5 23,473 0.7
---------- ----- ---------- ----- ---------- ----- --------- -----
Financial system 46,677,551 100.0 31,674,779 100.0 28,003,245 100.0 3,592,868 100.0
========== ===== ========== ===== ========== ===== ========= =====
- ----------------------
Source: Superintendency of Banks
The Chilean banking industry has experienced increased competition in
recent years, which has led to, among other things, consolidation in the
industry. We expect the trends of increasing competition and consolidation to
continue. In 1996 Banco Santander-Chile agreed to merge with Banco Osorno and
the Superintendency of Banks approved the merger of Banco de Santiago and Banco
O'Higgins, effective January 1, 1997. Additionally, the former owners of Banco
Osorno acquired a controlling interest in Banco Concepcion, the ninth largest
private bank in Chile, pursuant to which the name of the institution was changed
to Corpbanca.
During 1998 Corpbanca purchased from Banco Sud Americano its consumer loan
division, "Corfinsa", and acquired 100% of the rights to Financiera Condell.
Financiera Condell was merged into Corpbanca, effective July 1, 1999. Also, in
July 1998 the former ING Bank reopened as Banco Falabella, and in October 1998
ABN AMRO Bank acquired Banco Real (worldwide), which led to a merger between the
two institutions in Chile, effected January 2000. The merger had no effect on
the financial system, given the small size of both banks.
In March 1999, Citibank acquired Financiera Atlas, a finance company with
an 8.3% market share in consumer loans, and integrated it into its Retail
Banking Division. In July 1999, Corpbanca acquired Financiera Condell, a
finance company with a consumer loan portfolio totaling Ch$146,513 million.
After such purchase, the only finance company left in the market was Financiera
Conosur, the largest one, with a consumer loan market share of 11.5%. In late
2002 Financiera Conosur was authorized by the Superintendency to become Banco
Conosur. Therefore, there are no finance companies left in the market.
During 2001, a Chilean financial group (the Luksic Group), which had a
controlling participation at Banco de A. Edwards, acquired control of Banco de
Chile and completed procedures to merge it with Banco de A. Edwards. The merger
became effective on January 1, 2002. On the first half of 2002 the Central Bank
sold its participation in Banco Santiago (See "--The Central Bank") to Grupo
Santander, following an agreement signed with them in 2000 and after a failed
attempt to sell those shares at a public offering. As a consequence of this
operation, Grupo Santander achieved full control of both Banco Santander and
Banco Santiago and proceeded to merge both
27
institutions. The merger gave birth to the largest banking institution in Chile,
Banco Santander Santiago with a 24.4% combined loan market share (27.9%
proforma).
The largest bank in Chile in terms of assets is Banco Santander Santiago,
with outstanding loans at December 31, 2002 of Ch$7,731,346 million (US$10,852.8
million), representing 24.4% of the total amount of loans made by the Chilean
financial system We face significant competition in the retail market from Banco
Santander Santiago and more generally from other large privately-owned Chilean
banks as well as BancoEstado, the only bank owned by the Republic of Chile. Most
Chilean private-sector banks have adopted the universal banking model and, like
us, are seeking to expand the range of products and services offered to
customers.
Subsidiaries from foreign banks have been operating in Chile since the
1930s. At December 31, 2002, such banks accounted for only 6.3% of total loans
made by the Chilean financial system. Banco Santander Santiago, accounting for
approximately 24.4% of total loans, was the Bank established in Chile (though
foreign-owned ) with the largest loan portfolio at December 31, 2002. Some of
the banks established in Chile are classified as foreign-owned, including
ourselves, since a controlling participation in them is owned by foreign
institutions and/or individuals. See "Major Shareholders -- Principal
Shareholders".
In the retail banking business, we compete with other private Chilean banks
and with BancoEstado. Among private Chilean banks, our strongest competitors in
the retail market were Banco Santander Santiago, Banco de Chile and Banco de
Credito e Inversiones. We consider that our most relevant competitors in the
corporate market are Banco de Chile, Banco Santander Santiago, and Banco de
Credito e Inversiones.
Commercial banks in Chile also compete with other financial intermediaries
that can provide larger companies with access to the capital markets as an
alternative to traditional bank financing.
In the markets served by our subsidiaries, i.e., financial consulting,
leasing, securities and insurance brokerage, investment fund management services
and mutual fund management services, we compete with other financial
institutions that offer similar services.
Loans
At December 31, 2002, we accounted for 6.62% of all loans made by the
Chilean financial system and 7.60% of the loans made by private Chilean banks.
The following table sets forth the percentage of the aggregate outstanding
principal amount of all loans made by the Chilean financial system at the end of
each of the last three years, that was held by each of the 12 largest private
sector banks:
Market Share of Loans at December 31,
---------------------------------------
2000 2001 2002
----------- --------- --------
Banco Santander Santiago (1) ......... 11.3 11.9 24.4
Banco de Chile (2) ................... 12.4 11.9 18.6
Banco de Credito e Inv. .............. 8.2 8.9 10.4
BBVA Chile (3) ....................... 5.7 5.9 6.6
Corpbanca ............................ 4.3 4.8 5.4
Banco del Desarrollo ................. 3.5 3.6 3.7
Scotiabank Sudamericano (4) .......... 3.5 3.5 3.7
Citibank ............................. 3.8 3.4 3.2
Banco Bice ........................... 2.7 2.6 2.6
Banco Santiago (1) ................... 15.4 16.0 -
Banco Edwards (2) .................... 8.1 7.3 -
----- ----- -----
Total ................................ 78.9 79.6 78.6
===== ===== =====
Total Private Banks .................. 88.0 87.8 86.7
===== ===== =====
Financial System ..................... 100.0 100.0 100.0
===== ===== =====
28
- ----------------------
Source: Superintendency of Banks
(1) Banco Santander and Banco Santiago merged, effective August 2002
(2) Banco de Chile and Banco Edwards merged effective January 2002
(3) BBVA Banco BHIF changed its name to BBVA Chile, effective March 17, 2003
(4) Banco Sud Americano changed its name to Banco Scotiabank Sud Americano
effective November 15, 2001
Risk Index
Our performance until 1996 was largely attributable to our policy of
charging off all D loans and certain C loans. Upon reaching a 1% risk level, we
abandoned this policy, and since then have relied on our credit approval process
and credit policies to keep control and enhance the quality of our loan
portfolio. For a complete explanation of Chilean regulations on loan portfolio,
see "--Selected Statistical Information--Classification of Loan Portfolio".
In 1997 the Superintendency of Banks established new rules applicable to
the definition of risk and provision requirements. This change was directed
towards a more adequate assessment of the true quality of the loans, reducing
the rating of consumer loans that had been subject to a certain degree of
rescheduling. This measure implicated a significant increase in the level of
provisions for those banks and finance companies that carried an old and
important consumer loan portfolio. That was not our case, and the increase in
provisions related to rescheduled consumer loans required by the rules adopted
in 1997 was not significant.
In 1998, soon after the BBVA Group took control of BBVA Chile, we conducted
an extensive revision of our loan portfolio, which resulted in the downgrading
of a part of our portfolio and a significant increase in the level of provisions
and in our risk level.
The following table illustrates the five year history of BBVA Chile`s
unconsolidated loan portfolio risk index compared to the unconsolidated loan
portfolio risk index of the largest private Chilean banks and that of the
financial system as a whole. See "--Selected Statistical
Information--Classification of Loan Portfolio".
Risk Index(1)
At October 31,
--------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(Percentages)
Banco de Chile ................ 1.60 2.07 2.01 2.03 3.0
Banco del Desarrollo .......... 2.03 3.25 3.49 2.85 2.6
Scotiabank Sudamericano ....... 2.00 2.77 3.76 3.18 2.0
Corpbanca ..................... 1.52 2.00 1.87 1.80 2.0
BBVA Chile .................... 1.55 2.11 2.18 1.81 1.7
Banco Bice .................... 1.86 1.22 1.53 1.41 1.7
Banco Santander Santiago ...... 1.16 1.23 1.42 1.38 1.6
Banco de Credito e Inv. ....... 0.91 1.57 1.95 1.63 1.3
Security ...................... 0.86 1.12 0.87 0.99 1.2
Banco Edwards ................. 1.32 2.79 2.9 3.23 -
Banco Santiago ................ 0.93 1.39 1.34 1.26 -
Financial System .............. 1.50 1.98 2.08 1.90 2.0
- ----------------------
Source: Superintendency of Banks
(1) Information with respect to the Chilean financial system as of a later date
in 2002 is not publicly available. The risk index of BBVA Chile was 1.67%
at December 31, 2002. See "--Selected Statistical
Information--Allowance for Loan Losses--Global Allowance for Loan Losses."
Deposits
We held total deposits of Ch$1,912,485 million at December 31, 2002, which
represented 8.0% of deposits held by Chilean private banks at that date. The
following table sets forth the percentage of the aggregate amount of all
deposits in the Chilean financial system at the end of each of the last three
years, that was held by each of the twelve largest private Chilean banks.
29
Market Share of Deposits at December 31,
----------------------------------------
2000 2001 2002
---- ---- ----
Banco Santander ................... 12.5 13.1 21.6
Banco de Chile .................... 12.8 12.8 16.3
Banco de Credito e Inv. ........... 7.2 7.8 8.8
BBVA Chile ........................ 5.0 5.6 7.3
Corpbanca ......................... 4.9 5.2 5.5
Citibank .......................... 3.8 3.7 4.8
Security .......................... 3.2 2.7 3.1
Scotiabank Sudamericano ........... 3.2 2.6 3.0
Banco del Desarrollo .............. 3.0 2.8 2.9
Banco Bice ........................ 2.8 3.2 2.6
Banco Santiago .................... 12.4 13.7 -
Banco Edwards ..................... 7.6 7.0 -
------ ------ ------
Total ............................. 78.4 80.3 76.0
====== ====== ======
Total Private Banks ............... 88.26 88.33 85.25
Financial System .................. 100.0% 100.0% 100.0%
- ----------------------
Source: Superintendency of Banks
Return on Equity
At December 31, 2002, our unconsolidated return on equity was 9.1%. It was
substantially lower than the 14.4% average for the entire Chilean financial
system. During the last three years, we have maintained a profitability index
averaging around 7.3% each year.
The following table sets forth for the last three years, the unconsolidated
return on shareholders' equity of the largest private Chilean banks and the
Chilean financial system as a whole, in each case at December 31 in each of the
last three years.
Ranking at
Return on Equity At December 31, December 31,
---------------------------------- ------------
2000 2001 2002 2002
---- ---- ---- ----
Banco de Credito e Inv. ... 20.2% 23.8% 22.6% 1
Banco Santander ........... 25.1% 25.5% 19.5% 2
Banco Bice ................ 13.2% 25.7% 18.2% 3
Citibank .................. 10.8% 15.1% 14.1% 4
Corpbanca ................. 12.0% 20.1% 13.3% 5
Banco del Desarrollo ...... 15.1% 14.2% 13.1% 6
Security .................. 14.1% 13.1% 12.9% 7
Banco de Chile ............ 27.2% 27.9% 9.3% 8
Scotiabank Sudamericano ... 4.9% 6.2% 9.3% 9
BBVA Chile ................ 6.3% 6.5% 9.1% 10
Banco Santiago ............ 21.9% 28.3% -- 11
Banco Edwards ............. 1.4% 4.4% -- 12
---- ---- ----- ----
Financial System .......... 12.8% 17.7% 14.4%
- ----------------------
Source: Superintendency of Banks
30
CHILEAN REGULATION AND SUPERVISION
In Chile, only banks may maintain checking accounts for their customers,
conduct foreign trade operations by means of the issuance of letter of credits
and, together with finance companies, accept time deposits. The principal
authorities that regulate financial institutions in Chile are the
Superintendencia de Bancos e Instituciones Financieras (the "Superintendency of
Banks") and the Central Bank. Chilean banks are subject to the General Banking
Law and, to the extent not inconsistent therewith, the Chilean Companies Law.
The Chilean banking system was established in 1925 and has been
characterized by periods of substantial regulation and state intervention, as
well as periods of deregulation. The most recent period of deregulation
commenced in 1974 and resulted in substantial amendment to the General Banking
Law. As a result of the amendment to the General Banking Law passed by the
Chilean Congress in December 1997, Chilean banks are authorized in principle to
conduct additional activities such as underwriting, transportation of
securities, financial services (portfolio management), and direct financial
advisory services, and, through subsidiaries, to engage in securitizations,
brokerage of non-pension fund insurance, loan collection, leasing, factoring,
management of investment, mutual and foreign capital investment funds, brokerage
of securities, custody and transportation of securities.
In response to the Chilean banking crisis during 1982 and 1983, the
Superintendency of Banks assumed control of 19 banks and financial institutions
accounting for approximately 51% of the total loans in the banking system. As
part of the solution to this crisis, the Central Bank permitted these
institutions to sell to the Central Bank certain of their non-performing loans
in exchange for cash, third party drafts and a promissory note of the Central
Bank. Each institution was to repurchase the loans sold by it to the Central
Bank out of its future income.
In addition, Law No. 18,818, promulgated in 1989, permitted institutions
with outstanding repurchase obligations with the Central Bank to evidence a
portion of such obligations by a subordinated obligation with no fixed term. In
the case of liquidation of the institution, the subordinated debt obligations
would be paid only after the bank's other debts had been paid in full. See
"--The Central Bank".
The Central Bank
The Central Bank is an autonomous legal entity created by the Chilean
Constitution. It is subject to the Central Bank Act and, to the extent
applicable and not inconsistent, to the laws and regulations applicable to the
private sector. It is governed and administered by a Board of Directors composed
of five members designated by the President of the Republic subject to prior
approval by the Senate.
The Central Bank's principal regulatory responsibilities is to provide for
the stability of the currency system and the due payment of both internal and
foreign debts. The Central Bank's powers include setting reserve requirements,
regulating the amount of money and credit in circulation, and establishing
regulations and guidelines regarding the financial system and the capitals
market, the Formal Exchange Market and banks' deposit-taking activities, and
operating as a bank's lender of last resort.
Background
During 1982 and 1983, the Chilean banking system experienced significant
instability due to, among other factors, a recession in the United States and
other countries accompanied by high international interest rates, the
overvaluation of the Chilean peso, a lack of stringent banking regulation and a
lack of effective credit policies at most Chilean banks. The situation resulted
in a banking crisis which required the Central Bank and the Chilean government
to provide assistance to most Chilean private sector banks and, in the case of
certain institutions (accounting for approximately 51% of the total loans in the
banking system), the Superintendency of Banks was required to assume control. We
were not among the institutions subjected to control by the Superintendency of
Banks.
As one form of assistance to private sector financial institutions, the
Central Bank permitted certain banks to sell to the Central Bank certain of
their non-performing loans in exchange for cash, third party drafts and a
31
promissory note of the Central Bank. Each bank which sold non-performing loans
to the Central Bank agreed to repurchase the loans out of its future income. In
1989, the Chilean government enacted Ley No. 18,818, which permitted banks with
outstanding repurchase obligations to reacquire the loans still being held by
the Central Bank for a price payable in cash equal to the actual economic value
of such loans at the time of repurchase as appraised by the Superintendency of
Banks. Ley No. 18,818 also provided that the obligation to pay the difference
between the price initially paid to each bank by the Central Bank for the loans
and the amount paid by such bank to the Central Bank to reacquire its loans
would constitute subordinated obligations of the bank with no fixed term, known
as deuda subordinada ("Central Bank Subordinated Debt"). In the case of
liquidation of the bank, the subordinated debt obligations were to be paid only
after the bank's other debts had been paid in full. The law provided, however,
that until the subordinated debt obligations of a bank were discharged in full,
the bank was required to make certain payments in respect of the subordinated
debt obligations to the Central Bank out of net profits. As a result, a bank
with subordinated debt obligations was limited in its ability to retain net
income to support its growth and for general corporate purposes. In addition,
the law provided that holders of common shares of the bank outstanding at the
time the subordinated debt obligations were created were not permitted to
receive dividends until the subordinated debt obligations were paid in full.
However, holders of shares issued after the creation of the subordinated debt
obligations and with the prior approval of the Central Bank ("shares of
preferred stock" or "preferred shares") could receive dividends, to the extent
declared, but only in an amount expressed as a percentage of the dividends that
would have been payable to a holder of common shares in the absence of the
prohibition on payment of dividends on common shares described above. Holders of
shares of preferred stock could therefore receive as dividends a portion of the
bank's income before provision for the subordinated debt obligations ("Surplus")
to the extent otherwise permitted by law unless such income was further
capitalized.
In 1995, the Chilean Congress enacted the Subordinated Debt Bill enabling
banks owing subordinated debt obligations to the Central Bank to agree with the
Central Bank to modify the repayment terms of such debt. Banks that elected not
to be governed by the Subordinated Debt Bill would be obligated to repay their
subordinated debt obligations in accordance with prior law. Banks that elected
to be governed by the Subordinated Debt Bill would be required to repay and
discharge their subordinated debt obligations in accordance with a repayment
schedule agreed upon with the Central Bank, and in any event within 40 years.
The amount of each installment depended upon whether or not at the time the bank
makes such election it was deemed capable of repaying its subordinated debt
obligation within 40 years, based on a series of parameters set forth in the
Subordinated Debt Bill. The Subordinated Debt Bill further provided that if a
bank was deemed incapable of repaying its subordinated debt obligation within 40
years, such bank could enter into an agreement with the Central Bank stipulating
that its subordinated debt obligation would be repaid with the proceeds of the
sale of shares of such bank in the context of a program approved by the Central
Bank. Such program could involve one or more offerings but had to be completed
within a maximum of ten years. The shares sold pursuant to the program
established by the bank and the Central Bank would be entitled to receive
dividends, if and when such dividends were declared by the shareholders, in
accordance with Chilean corporate law and subject to legal reserve requirements.
Holders of record of shares of preferred stock of any such bank on the day the
program was approved by the Central Bank, which were entitled to receive a
percentage of the bank's annual Surplus, had the right to subscribe for shares
offered pursuant to the program in proportion to such percentage.
We chose to be governed by the Subordinated Debt Bill, and pursuant thereto
agreed with the Central Bank to enter into a program involving the issuance and
sale of 91,348,388 Common Shares and the repayment and cancellation of the
Central Bank Subordinated Debt with the proceeds of the sale of such shares (the
"Program"). Pursuant to the Program and the Subordinated Debt Bill, the Central
Bank Subordinated Debt was repaid and discharged in full upon payment to the
Central Bank of the net proceeds of an offering of our shares of common stock in
Chile and internationally, completed on June 24, 1996.
The Superintendency of Banks
Banks are supervised and regulated by the Superintendency of Banks, an
independent Chilean governmental agency. The Superintendency of Banks authorizes
the creation of new banks and has broad powers to interpret and enforce legal
and regulatory requirements. Furthermore, in the case of non-compliance, the
Superintendency of Banks has the ability to impose sanctions. In extreme cases
it can appoint, with the prior approval of the Board of
32
Directors of the Central Bank, a provisional administrator to manage a bank. It
must also approve any amendment to a bank's by-laws or any increase in its
capital.
The Superintendency of Banks examines randomly all banks from time to time,
generally at least once a year. Banks are also required to submit their
financial statements monthly to the Superintendency of Banks, and the banks
financial statements are published four times a year at the end of each quarter,
in any newspaper with national coverage. In addition, banks are required to
provide extensive information regarding their operations at various periodic
intervals to the Superintendency of Banks. A bank's annual financial statements
and the opinion of its independent auditors must also be submitted for review by
the Superintendency of Banks.
Any person acquiring 10% or more of the share capital of a bank must obtain
the prior approval of the Superintendency of Banks. Noncompliance with this
requirement results in the suspension of the voting rights with respect to the
acquired shares.
Pursuant to the regulations of the Superintendency of Banks, the following
ownership disclosures are required: (a) banks are required to inform the
Superintendency of Banks of the identity of any person owning, directly or
indirectly, 5% or more of such bank's shares, (b) holders of ADSs must disclose
to the Depositary the identity of beneficial owners of ADSs registered under
such holders' names, and (c) the Depositary is required to notify either the
bank or the Superintendency of Banks as to the identity of beneficial owners of
ADSs which such Depositary has registered.
Limitations on Types of Activities
Chilean banks may only conduct activities expressly allowed by the General
Banking Law, which include the following activities: lend, accept deposits, and,
subject to limitations, invest and perform financial services. Investments are
restricted to real estate for their own use, gold, foreign exchange and debt
securities. Through subsidiaries, they may also engage in certain specific
activities, such as securities brokerage services and mutual fund management.
Subject to certain limitations and the prior approval of the Superintendency of
Banks and the Central Bank, Chilean banks may own majority or minority interests
in foreign banks. As a result of an amendment to the General Banking Law passed
by the Chilean Congress in December 1997, Chilean banks and their subsidiaries
are authorized in principle to conduct additional activities. See "Chilean
Regulation and Supervision--Other Businesses".
Deposit Insurance
In Chile, the State guarantees up to 90% of the principal amount of certain
time deposits of individuals. The State guarantee is subject to a maximum
payment of UF108 per person for each calendar year (Ch$1.8 million, or US$2,538
at December 31, 2002).
Reserve Requirements
Deposits are subject to a reserve requirement of 9% for Chilean
peso-denominated demand deposits, 3.6% for Chilean peso-denominated time
deposits, 19% for dollar and other foreign currency-denominated demand deposits,
and 13.6% for dollar-denominated time deposits and other foreign
currency-denominated obligations of ours. The Central Bank has statutory
authority to increase reserve requirements up to an average of 40% for demand
deposits and up to 20% for time deposits, to implement monetary policy. For the
purposes of reserve requirements, demand deposits include any deposit that can
be withdrawn in a time period less than 30 days.
In addition, a 100% special reserve (reserva tecnica) applies to demand
deposits, deposits in checking accounts, other dividend deposits received or
obligations payable on sight incurred in the ordinary course of business, other
deposits unconditionally payable within a term of less than 30 days and other
time deposits payable within a term of 10 days to the extent their aggregate
amount exceeds 2.5 times the amount of a bank's paid-in capital and reserves.
33
Minimum Capital
Under the General Banking Law, a bank must have a minimum of UF800,000 of
paid-in capital and reserves (Ch$13,395 million or US$18.8 million at December
31, 2002).
Capital Adequacy Requirements
According to the current General Banking Law, banks should have a minimum
ratio of Total Capital to Risk Adjusted Assets of 8%, net of required allowances
for loans losses, and a minimum ratio of Basic Capital to Total Assets of 3%,
net of required allowances for loan losses. For these purposes, "Total Capital"
means the aggregate of: (a) a bank's paid-in capital and reserves, excluding
capital attributed to certain subsidiaries and foreign branches, (b) its
subordinated bonds, calculated at the placement price but not exceeding 50% of
its Basic Capital, and (c) its voluntary allowances for loan losses, up to 1.25%
of the Risk Adjusted Assets. Basic Capital includes paid-in capital and
reserves, but excludes the net income for the period. Risk Adjusted Assets are
based on total assets, which are then classified into five categories, each of
which has a different weight.
Lending Limits
Under the General Banking Law, Chilean banks are subject to certain lending
limits, including the following:
(i) a bank may not extend to any one entity (or group of related
entities), directly or indirectly, unsecured credit in an amount that
exceeds 5% of the bank's Total Capital; or secured credit in an amount
that exceeds 25% of its Total Capital. In the case of foreign export
trade financing, the 5% ceiling for unsecured credits is raised to 10%
and the 25% ceiling for secured credits to 30%. In the case of
financing of infrastructure projects under concession, the ceiling is
raised to 15% if secured by a pledge on the concession or if granted
by two or more banks or financial institutions that have executed a
credit agreement with the constructor or the holder of the concession;
(ii) a bank may not extend loans to another financial institution in an
aggregate amount exceeding 30% of its Total Capital;
(iii) a bank may not directly or indirectly grant a loan, the purpose of
which is to allow an entity or individual to acquire shares of the
lender bank;
(iv) a bank may not lend, directly or indirectly, to a director or any
other person who has the power to act on behalf of the bank or to
certain related parties of the same; and
(v) a bank may not grant loans to related parties (including holders of 1%
or more of its shares) on more favorable terms than those generally
offered to non-related parties. Loans to directors, management and
companies in which such individuals have a participation of 5% or more
of equity or net earnings are not permitted under the General Banking
Law. The aggregate amount of loans to related parties may not exceed a
bank's Total Capital. See "Related Party Transactions--Interest of
Management in Certain Transactions".
In addition, the General Banking Law limits the aggregate amount of loans
that a bank may grant to its employees to 1.5% of its Total Capital, and
provides that no individual employee may receive loans in excess of 10% of this
1.5% limit. Notwithstanding these limitations, a bank may grant to each of its
employees a single home mortgage loan for personal use once during such
employee's term of employment.
Loan Loss Reserves
Chilean banks are required to provide to the Superintendency of Banks
detailed information regarding their loan portfolio on a monthly basis. Each
bank is also required to maintain a global allowance for loan losses, the amount
of which must equal the aggregate amount of its outstanding loans multiplied by
the greater of (i) its "risk index", or (ii) 0.75%. See "Selected Statistical
Information--Allowance For Loan Losses" for an explanation of the "risk
34
index" and other information regarding our allowance for loan losses. At
December 31, 2002, our risk index was 1.65% compared with an average for the
financial system as a whole (i.e., all banks and finance companies) of 1.95% as
of October 31, 2002, the last date in 2002 for which public information was
available. See "--Competition--Risk Index".
Banks in Chile are also required to maintain an individual allowance for
loan loss for each past due loan (loans that are overdue as to any payment of
principal or interest by 90 or more days). An individual allowance for loan loss
equal to 100% is required for each such past due loan or the part thereof that
is unsecured if (and to the extent) such past due loans exceed in the aggregate
a bank's global allowance for loan loss. At December 31, 2002, the aggregate
amount of our potential individual allowances for loan loss was 4.22% of its
global allowance for loan losses. A bank may also voluntarily maintain
additional allowances for loan losses in excess of the minimum amounts required
as global and individual allowances. See "--Selected Statistical
Information--Allowance for Loan Losses--Voluntary Allowance For Loan Losses" and
Note 1.k) to the Consolidated Financial Statements.
Foreign Exchange
The foreign exchange operations of Chilean banks are subject to the
following limitations: First, the balance, whether positive or negative, between
the bank's assets and liabilities denominated in foreign currency (including
assets and liabilities denominated in US$ dollars but payable in Chilean pesos,
as well as those denominated in Chilean pesos and adjusted by the variation of
the US$ dollar exchange rate) cannot exceed 20% of its paid-in capital and
reserves; provided that if its assets are higher than its liabilities it may
exceed such 20% in an amount equal to its allowances and reserves in foreign
currency (excluding those which correspond to profits to be remitted abroad).
Second, there is a reserve requirement of 13.6% applicable to all foreign
currency-denominated obligations owed by a bank including demand deposits, time
deposits and foreign loans (including international board offerings), regulated
under Chapter XIII of the Compendio de Normas de Cambios Internacionales (the
"Compendium"). The Central Bank has agreed to pay interest on 10% of the amounts
that are deposited to comply with the foregoing reserve requirements.
Capital Markets
Under the General Banking Law, banks in Chile may only purchase, sell,
place, underwrite and act as a paying agent with respect to certain debt
securities. Banks may also place and underwrite certain equity securities of
public companies. Bank subsidiaries may also engage in debt placement and
dealing, equity issuance advice and securities brokerage, as well as in mutual
funds, investment management advisory services, merger and acquisition services,
factoring, insurance brokerage (excluding insurance in connection with
pensions), securitization and leasing activities. These subsidiaries are
regulated by the Superintendency of Banks and, in some cases, also by the
Superintendency of Securities and Insurance.
Financial Institutions with Economic Difficulties
Unless under voluntary liquidation, banks may not be declared in
bankruptcy. The General Banking Law provides that if certain specified adverse
circumstances exist at any bank, its Board of Directors must correct the
situation within 30 days from the date of receipt of the relevant financial
statements. If the Board is unable to do so, it must call a special
shareholders' meeting to increase the capital of the bank by the amount
necessary to return the bank to financial stability. If the shareholders reject
the capital increase, if it is not effected within the term agreed at the
meeting or if the Superintendency of Banks does not approve the Board's
proposal, the bank will be barred from increasing its loan portfolio beyond that
stated in the financial statements presented to the Board and from making any
further investments in any instrument other than in instruments issued by the
Central Bank. In such a case, or in the event that a bank is unable to make
timely payment in respect of its obligations, the General Banking Law provides
that the bank may receive a two-year term loan from another bank. The terms and
conditions of such loans must be approved by the directors of both banks, as
well as by the Superintendency of Banks, but need not be submitted to the
borrowing bank's shareholders for their approval. In any event, a creditor bank
may not grant loans to an insolvent bank in an amount exceeding 25% of the
creditor bank's regulatory capital and reserves.
35
Dissolution and Liquidation of Banks
The Superintendency of Banks may determine that a bank should be liquidated
for the benefit of its depositors or other creditors when the bank does not have
the necessary solvency to continue its operations. The Superintendency of Banks
may revoke a bank's authorization to exist and order its mandatory liquidation
subject to agreement by the Board of Directors of the Central Bank. The
resolution by the Superintendency of Banks must state the reason for ordering
the liquidation and must name a liquidator, unless the Superintendency of Banks
itself assumes such responsibility. When a liquidation is declared, all deposits
on checking accounts, other demand deposits received or obligations payable on
sight incurred in the ordinary course of business, other deposits
unconditionally payable immediately or within 30 days, and any other deposits
and receipts payable within 10 days are required to be paid by using existing
funds of the bank, its deposits with the Central Bank or its investments in
instruments that represent its reserves. If these funds are insufficient to pay
these obligations, the liquidator may seize the rest of the bank's assets, as
necessary. If necessary, the Central Bank will lend the bank the funds necessary
to pay these obligations. Any such Central Bank loans are preferential to any
claims of other creditors of the liquidated bank.
Foreign Operations
Under current Chilean banking regulations, banks may invest in certain
foreign currency securities and may grant loans to foreign individual and
entities. With respect to equity securities, banks in Chile may only invest in
equity securities of foreign banks and certain other foreign companies in which
Chilean banks would be able to invest, if those companies were incorporated in
Chile. Banks may only invest in debt securities traded in formal secondary
markets located in countries where its sovereign rating is at least BB-. Such
debt securities shall qualify as (i) securities issued or guaranteed by foreign
sovereign states or their Central Banks or other foreign or international
financial entities, and (ii) bonds issued by foreign companies. Such debt
securities must have a minimum rating as follows:
Rating Agency Short-Term Long-Term
- --------------------------------------------- ---------- ---------
Moody's...................................... P2 Baa3
Standard & Poor's............................ A3 BBB-
Fitch Ratings................................ F2 BBB-
Banks may also invest in (i) unrated debt securities as long as such
securities are issued or guaranteed by foreign sovereign states or their Central
Banks. For this purpose, it will be assumed that the rating of the debt security
is the international rating of the country where the issuer is located, and (ii)
structured notes issued by investment banks that are rated higher than the
ratings described above, so long as such notes are linked to a debt instrument
issued by a sovereign or corporate entity and rated at least at the ratings
described above.
The debt securities to be purchased by Chilean banks may have a lower
rating, as long as certain other conditions specified in the regulations of the
Central Bank are met.
Subject to certain conditions, a bank may grant loans in foreign currency
to subsidiaries or branches of Chilean corporations located abroad, to companies
listed on foreign stock exchanges rated at least BB-, and in general to
individuals and entities domiciled abroad, as long as the Central Bank is kept
informed of such activities.
Additionally, banks may acquire loans granted to the individuals or
entities described in the foregoing paragraph as well as participation in
syndicated loans granted to individuals or entities domiciled abroad.
Lastly, banks may grant loans to finance export transactions to Chilean
residents or to individuals or entities domiciled abroad.
In the event the sum of the investments of a bank in foreign currency
securities and of the loans granted to foreign individuals and entities exceeds
70% of the Total Capital of such bank, the excess is subject to a mandatory
reserve of 100%.
36
Other Businesses
In December 1997, the Chilean Congress amended the General Banking Law,
authorizing Chilean banks in principle to conduct additional activities such as
factoring, underwriting, transportation of securities, financial services
(portfolio management), leasing and direct financial advisory services.
Furthermore, such amendment gave the Superintendency of Banks discretionary
power to allow banks to engage through subsidiaries in other types of
activities, such as securitizations, brokerage of non-pension fund insurance,
loan collection, factoring and custody and transportation of securities.
As a result of the amended General Banking Law, Chilean banks are now
allowed to establish, in addition to branches and representative offices outside
Chile, foreign subsidiaries (or have minority interests in foreign entities)
engaged in banking activities or in any of the types of non-banking activities
in which Chilean banks can engage through domestic subsidiaries. It also permits
Chilean-based banking offices, under certain conditions, to make loans to many
types of entities located in other countries.
Besides the activities linked to the subsidiaries, the operations profile
of the bank was expanded by permitting the execution of underwriting agreements
for public placement of stocks and the possibility of development for financial
services for third parties.
Mark to Market Requirements for Financial Investments
In September 1998, the Superintendency of Banks modified the regulations
regarding the valuation of financial investments. Pursuant to the new
regulations, a bank may differentiate its financial investments between
permanent investments and short-term investments. The value of the permanent
investment portfolio cannot exceed such bank's basic capital. In addition, once
a financial investment is classified as a permanent investment, it can only be
removed when it reaches maturity or when it is sold. The fluctuation in the
market value of the financial investments transferred to the permanent
investment account is not recorded in the income statement but is recorded in
other reserves in shareholders' equity.
Allowance Requirements for Consumer Lending
Pursuant to requirements for consumer lending established by the
Superintendency of Banks, a bank must revise the credit rating of all loans made
to a particular borrower if the bank renegotiates any loan with that borrower.
In addition, a bank must classify all consumer loans of a single borrower
according to the borrower's worst rated loan. Finally, a bank must establish and
abide by more stringent follow-up procedures relating to a borrower's consumer
loans with other financial institutions. For example, a bank must automatically
review a borrower's allowance amount when the borrower's records display a
non-performing loan or other kind of negative credit behavior in the databases
of the Superintendency of Banks or a private information service, even if the
borrower is not in default vis-a-vis the bank.
SELECTED STATISTICAL INFORMATION
The following information is included for analytical purposes and should be
read in conjunction with our Consolidated Financial Statements as well as
"Operating and Financial Review and Prospects". The financial data in the
following tables as of and for all year-end periods have been restated in
constant Chilean pesos of December 31, 2002. See Note 1.c) to Consolidated
Financial Statements.
Average Balance Sheets and Interest Rate Data
The average balances for interest earning assets and interest bearing
liabilities have been calculated on the basis of daily balances of BBVA Chile
and on the basis of month end balances for our subsidiaries. Such average
balances are presented in Chilean pesos (Ch$), in UF and in foreign currencies
(principally US$).
37
The nominal interest rate has been calculated by dividing the amount of
interest and principal readjustment gain or loss during the period by the
related average balance, both amounts expressed in constant Chilean pesos. The
nominal rates calculated for each period have been converted into real rates
using the following formulas:
1+Np (1+Nd)(1+D)
Rp= ---- -1 Rd= ---------- -1
1+I 1+I
Where:
Rp = real average rate for Chilean peso-denominated assets and liabilities
(in Ch$ and UF) for the period;
Rd = real average rate for foreign currency-denominated assets and
liabilities for the period;
Np = nominal average rate for Chilean peso-denominated assets and
liabilities for the period;
Nd = nominal average rate for foreign currency-denominated assets and
liabilities for the period;
D = depreciation rate of the Chilean peso to the dollar for the period; and
I = inflation rate in Chile for the period (based on the variation of
the CPI).
The real interest rate can be negative for a portfolio of Chilean
peso-denominated loans when the inflation rate for the period is higher than the
average nominal rate of the loan portfolio for the same period. A similar effect
could occur for a portfolio of foreign currency-denominated loans when the
inflation rate for the period is higher than the sum of the depreciation rate
for the period and the corresponding average nominal rate of the portfolio.
The formula for the average real rate for foreign currency-denominated
assets and liabilities (Rd) reflects a gain or loss in purchasing power caused
by the difference between the depreciation rate of the Chilean peso and the
inflation rate in Chile during the period. The following example illustrates the
calculation of the real interest rate for a US$-denominated asset earning a
nominal annual interest rate of 10% (Nd = 0.10), assuming a 5% annual
depreciation rate (D = 0.05) and a 12% annual inflation rate (I = 0.12):
(1+0.10)(1+0.05)
Rd= ---------------- -1 = 3.125% per year
1 + 0.12
In the example, since the inflation rate was higher than the depreciation
rate, the real rate is lower than the nominal rate in dollars. If, for example,
the annual depreciation rate were 15%, using the same numbers, the real rate in
Chilean pesos would be 12.9%, which is higher than the nominal rate in dollars.
Using the same numbers, if the annual inflation rate were greater than 15.5%,
the real rate would be negative.
Contingent loans (consisting of guarantees and outstanding and undrawn
letters of credit) have been treated as interest earning assets. Although the
nature of the income derived from such assets is similar to a fee, Chilean
banking regulations require that such income be accounted for as interest
revenue. As a result of this treatment, the comparatively low rates of interest
earned on these assets have a distorting effect on the average interest rate
earned on total earning assets.
The real rate for contingent loans has been stated as the nominal rate,
since we do not have an effective funding obligation for these loans. The
foreign exchange gains or losses on foreign currency-denominated assets and
liabilities have not been included in interest revenue or expense. Similarly,
interest on financial investments does not include trading gains or losses on
these investments.
Non-performing loans that are not yet 90 or more days overdue, as well as
restructured loans earning interest at two or more percentage points below our
average rate for similar types of performing loans at the date of the
restructuring, have been included in each of the various categories of loans
and, therefore, affect the various averages. Non-performing loans that are 90 or
more days overdue are shown as a separate category of loans ("Past due loans").
Interest and/or indexation readjustments received on all non-performing loans
during the periods are included as interest revenue.
38
Included in interbank deposits are current accounts maintained in the
Central Bank and overseas banks. Such assets have a distorting effect on the
average interest rate earned on total interest earning assets because (i)
balances maintained in the Central Bank only receive interest on the amounts
which are legally required to be held for liquidity purposes, and (ii) balances
maintained in overseas banks earn interest only for certain accounts in certain
countries. Consequently, the average interest earned on such assets is
comparatively low. These deposits are maintained by us in these accounts to
comply with statutory requirements and to facilitate international business,
rather than to earn income.
The monetary gain or loss on interest earning assets and interest bearing
liabilities is not included as a component of interest revenue or interest
expense because inflation effects are taken into account in the calculation of
real interest rates.
The following tables show, by currency of denomination, average balances
and, where applicable, interest amounts earned and paid average nominal rates
and average real rates for our interest earning assets and interest bearing
liabilities for the years ended December 31, 2000, 2001 and 2002.
Outstanding Mortgage finance bonds issued as of December 31, 2002 and those
issues as of December 31, 2001, have been presented net of its corresponding
liability. Outstanding Mortgage finance bonds issued prior to year 2001 have not
been presented net of its corresponding liability, the same presentation as in
previous reports.
Year ended December 31,
--------------------------------------------------------------------------------------------------------------
2000 2001 2002
----------------------------------- ---------------------------------- -----------------------------------
Average Average Average Average Average Average
Average Interest nominal real Average Interest nominal real Average Interest nominal real
balance earned rate rate balance earned rate rate balance earned rate rate
------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
ASSETS
INTEREST
EARNING ASSETS
Interbank
deposits
Ch$.............. 13,944 467 3.3% (1.1)% 22,433 482 2.1% (0.4)% 23,703 432 1.8 (1.0)
UF............... 0 0 0.0 0.0 0 0 0.0 0.0 0 0 0.0 0.0
Foreign currency. 11,523 50 0.4 4.3 4,536 89 2.0 13.9 10,819 104 1.0 6.6
-------- ------- ---- ---- --------- ------- ---- ---- --------- ------- ---- ----
Total......... 25,467 517 2.0 1.3 26,969 571 2.1 2.0 34,522 536 1.6 1.4
======== ======= ========= ======= ========= =======
Investments
Ch$.............. 95,636 11,018 11.5 6.7 196,317 18,572 9.5 6.7 179,715 7,215 4.0 1.2
UF............... 180,997 17,946 9.9 5.2 181,207 15,699 8.7 5.9 93,502 5,124 5.5 2.6
Foreign
currency........ 59,981 6,910 11.5 15.8 66,861 2,009 3.0 15.0 238,374 27,203 11.4 17.7
-------- ------- ---- ---- --------- ------- ---- ---- --------- ------- ---- ----
Total......... 336,614 35,874 10.7 7.5 444,385 36,280 8.2 7.6 511,591 39,542 7.7 9.1
======== ======= ========= ======= ========= =======
Commercial loans
Ch$.............. 87,960 13,530 15.4 10.4 114,338 14,233 12.4 9.6 192,077 15,953 8.3 5.4
UF............... 482,501 57,944 12.0 7.2 497,389 50,421 10.1 7.3 423,875 53,956 12.7 9.7
Foreign currency. 42,741 4,144 9.7 13.9 101,184 2,360 2.3 14.3 157,116 8,138 5.2 11.1
-------- ------- ---- ---- --------- ------- ---- ---- --------- ------- ---- ----
Total......... 613,202 75,618 12.3 8.1 712,911 67,014 9.4 8.7 773,068 78,047 10.1 8.9
======== ======= ========= ======= ========= =======
Consumer loans
Ch$.............. 118,916 26,506 22.3 17.0 142,109 30,595 21.5 18.4 163,122 32,550 20.0 16.7
UF............... 20,611 2,733 13.3 8.4 19,805 2,203 11.1 8.3 20,632 1,992 9.7 6.7
Foreign currency. 198 0 0.0 3.9 191 0 0.0 11.7 194 3 1.5 7.2
-------- ------- ---- ---- --------- ------- ---- ---- --------- ------- ---- ----
Total......... 139,725 29,239 20.9 15.7 162,105 32,798 20.2 17.2 183,948 34,545 18.8 15.6
======== ======= ========= ======= ========= =======
Mortgage loans
Ch$.............. 0 0 0.0 0.0 0 0 0.0 0.0 0 0 0.0 0.0
UF............... 248,868 34,129 13.7 8.8 239,109 36,736 15.4 12.4 237,765 25,222 10.6 7.6
Foreign currency. 0 0 0.0 0.0 0 0 0.0 0.0 0 0 0.0 0.0
-------- ------- ---- ---- --------- ------- ---- ---- --------- ------- ---- ----
Total......... 248,868 34,129 13.7 8.8 239,109 36,736 15.4 12.4 237,765 25,222 10.6 7.6
======== ======= ========= ======= ========= =======
Foreign trade loans
Ch$.............. 0 0 0.0 0.0 0 0 0.0 0.0 29,876 507 1.7 (1.1)
UF............... 0 0 0.0 0.0 0 0 0.0 0.0 0 0 0.0 0.0
Foreign currency. 128,873 10,047 7.8 11.9 164,040 10,225 6.2 18.6 169,479 7,335 4.3 10.2
-------- ------- ---- ---- --------- ------- ---- ---- --------- ------- ---- ----
Total......... 128,873 10,047 7.8 11.9 164,040 10,225 6.2 18.6 199,355 7,842 3.9 8.5
======== ======= ========= ======= ========= =======
Interbank loans
Ch$.............. 3,162 288 9.1 4.4 2,855 140 4.9 2.2 3,107 699 22.5 19.2
UF............... 0 0 0.0 0.0 0 11 0.0 0.0 783 461 58.9 54.5
39
Year ended December 31,
--------------------------------------------------------------------------------------------------------------
2000 2001 2002
------------------------------------- ---------------------------------- -------------------------------------
Average Average Average Average Average Average
Average Interest nominal real Average Interest nominal real Average Interest nominal real
balance earned rate rate balance earned rate rate balance earned rate rate
------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
Foreign currency. 261 0 0.0 3.9 112 0 0.0 11.7 1 0 0.0 5.6
-------- ------- ---- ---- --------- ------- ---- ---- --------- ------- ---- ----
Total......... 3,423 288 8.4 4.4 2,967 151 5.1 2.6 3,891 1,160 29.8 26.3
======== ======= ========= ======= ========= =======
Lease contracts
Ch$.............. 9,827 553 5.6 1.1 12,573 96 0.8 (1.8) 22,183 84 0.4 (2.4)
UF............... 39,314 6,618 16.8 11.8 46,463 6,719 14.5 11.6 41,662 6,388 15.3 12.2
Foreign currency. 4,138 730 17.7 22.2 3,317 827 24.9 39.5 4,237 (18) (0.4) 5.2
-------- ------- ---- ---- --------- ------- ---- ---- --------- ------- ---- ----
Total......... 53,279 7,901 14.8 10.6 62,353 7,642 12.3 10.4 68,082 6,454 9.5 7.0
======== ======= ========= ======= ========= =======
Other
outstanding
loans
Ch$.............. 45,793 9,440 20.6 15.4 51,841 1,870 3.6 1.0 54,408 6,699 12.3 9.3
UF............... 173,021 18,742 10.8 6.1 234,020 20,721 8.9 6.1 263,263 14,877 5.7 2.8
Foreign currency. 15 3 20.0 24.6 28 0 0.0 11.7 30 0 0.0 5.6
-------- ------- ---- ---- --------- ------- ---- ---- --------- ------- ---- ----
Total......... 218,829 28,185 12.9 8.1 285,889 22,591 7.9 5.2 317,701 21,576 6.8 3.9
======== ======= ========= ======= ========= =======
Past due loans
Ch$.............. 9,895 3,015 30.5 24.9 10,052 2,977 29.6 26.3 10,545 712 6.8 3.8
UF............... 18,234 372 2.0 (2.4) 28,959 400 1.4 (1.2) 28,483 62 0.2 (2.5)
Foreign currency. 2,425 39 1.6 5.5 1,599 0 0.0 11.7 1,260 0 0.0 5.6
-------- ------- ---- ---- --------- ------- ---- ---- --------- ------- ---- ----
Total......... 30,554 3,426 11.2 7.1 40,610 3,377 8.3 6.1 40,288 774 1.9 (0.6)
======== ======= ========= ======= ========= =======
Contingent loans
Ch$.............. 8,867 201 2.4 (2.0) 6,238 185 3.0 0.4 6,138 199 3.2 0.4
UF............... 19,100 356 1.9 (2.5) 19,029 382 2.0 (0.6) 22,158 331 1.5 (1.3)
Foreign currency. 33,729 209 0.6 4.5 44,368 242 0.5 12.3 44,965 236 0.5 6.2
-------- ------- ---- ---- --------- ------- ---- ---- --------- ------- ---- ----
Total......... 61,696 766 1.3 1.4 69,635 809 1.2 7.7 73,261 766 1.0 3.4
======== ======= ========= ======= ========= =======
Total interest
earning assets
Ch$.............. 394,000 65,018 16.5 11.5 558,756 69,150 12.4 9.6 684,874 65,050 9.5 6.5
UF...............1,182,646 138,840 11.7 6.9 1,265,981 133,292 10.5 7.7 1,132,123 108,413 9.6 6.6
Foreign currency. 283,884 22,132 7.8 12.0 386,236 15,752 4.1 16.3 626,475 43,001 6.9 12.9
--------- ------- ---- ---- --------- ------- ---- ---- --------- ------- ---- ----
Total.........1,860,530 225,990 12.1% 8.7% 2,210,973 218,194 9.9% 9.7% 2,443,472 216,464 8.9 8.2
========= ======= ========= ======= ========= =======
NON-INTEREST
EARNING ASSETS
Cash and due
from banks
Ch$.............. 221,869 216,237 234,886
UF............... 0 0 0
Foreign currency. 12,376 15,479 11,732
Total......... 234,245 231,716 246,618
Allowance for
loan losses
Ch$.............. (37,393) (38,795) (42,991)
UF............... 0 0 0
Foreign currency. 0 0 0
Total......... (37,393) (38,795) (42,991)
Bank premises
and equipment
Ch$.............. 55,518 57,656 56,502
UF............... 0 0 0
Foreign currency. 0 0 0
Total......... 55,518 57,656 56,502
Other assets
Ch$.............. 49,719 119,353 80,691
UF............... 629 717 641
Foreign currency. 20,075 33,432 62,145
Total......... 70,423 153,502 143,477
Total non-
interest
earning assets
Ch$.............. 289,712 354,451 329,088
UF............... 629 717 641
Foreign currency. 32,451 48,911 73,877
------- ------- -------
Total......... 322,792 404,079 403,606
======= ======= =======
TOTAL ASSETS
Ch$.............. 683,712 65,018 913,207 69,150 1,013,962 65,050
UF............... 1,183,275 138,840 1,266,698 133,292 1,132,764 108,413
40
Year ended December 31,
--------------------------------------------------------------------------------------------------------------
2000 2001 2002
------------------------------------- ---------------------------------- -------------------------------------
Average Average Average Average Average Average
Average Interest nominal real Average Interest nominal real Average Interest nominal real
balance earned rate rate balance earned rate rate balance earned rate rate
------- -------- ------- ------- ------- -------- ------- ------- ------- -------- ------- -------
Foreign currency. 316,335 22,132 435,147 15,752 700,352 43,001
--------- ------- --------- ------- --------- -------
Total......... 2,183,322 225,990 2,615,052 218,194 2,847,078 216,464
========= ======= ========= ======= ========= =======
LIABILITIES AND
SHAREHOLDERS'
EQUITY INTEREST
BEARING LIABILITIES
Savings accounts
Ch$............. 0 0 0.0% 0.0% 0 0 0.0% 0.0% 0 0 0.0 0.0
UF.............. 54,310 4,417 8.1 3.5 57,379 3,099 5.4 2.7 57,438 2,179 3.8 1.0
Foreign
currency........ 0 0 0.0 0.0 0 0 0.0 0.0 0 0 0.0 0.0
--------- ------- --- --- --------- ------- --- --- --------- ------- --- ---
Total......... 54,310 4,417 8.1 3.5 57,379 3,099 5.4 2.7 57,438 2,179 3.8 1.0
========= ======= ========= ======= ========= =======
Time deposits
Ch$............. 206,619 18,286 8.8 4.2 246,576 15,507 6.3 3.6 531,132 21,861 4.1 1.3
UF.............. 492,814 50,160 10.2 5.4 562,326 41,097 7.3 4.6 480,761 30,930 6.4 3.5
Foreign
currency........ 64,428 3,506 5.4 9.5 134,797 5,229 3.9 16.0 141,857 2,736 1.9 7.6
--------- ------- --- --- --------- ------- --- --- --------- ------- --- ---
Total......... 763,861 71,952 9.4 5.4 943,699 61,833 6.6 6.0 1,153,750 55,527 4.8 3.0
========= ======= ========= ======= ========= =======
Central Bank
borrowings
Ch$............. 1,106 111 10.1 5.3 13,086 879 6.7 4.0 7,024 295 4.2 1.4
UF.............. 15,084 1,383 9.2 4.5 12,928 1,004 7.8 5.0 9,844 722 7.3 4.4
Foreign
currency........ 4 1 0.0 0.0 0 0 0.0 0.0 0 0 0.0 0.0
--------- ------- --- --- --------- ------- --- --- --------- ------- --- ---
Total......... 16,194 1,495 9.2 4.5 26,014 1,883 7.2 4.5 16,868 1,017 6.0 3.1
========= ======= ========= ======= ========= =======
Securities sold
under
agreements to
repurchase
Ch$............. 162,099 16,407 10.1 5.4 192,647 14,276 7.4 4.7 72,999 4,781 6.5 3.6
UF.............. 12,177 1,176 9.7 4.9 17,623 1,165 6.6 3.9 371 23 6.2 3.3
Foreign
currency........ 0 0 0.0 0.0 351 6 0.0 0.0 150,855 1,444 1.0 (1.8)
--------- ------- --- --- --------- ------- --- --- --------- ------- --- ---
Total......... 174,276 17,583 10.1 5.3 210,621 15,447 7.3 4.6 224,225 6,248 2.8 0.0
========= ======= ========= ======= ========= =======
Mortgage finance
bonds
Ch$............. 0 0 0.0 0.0 0 0 0.0 0.0 0 0 0.0 0.0
UF.............. 259,999 28,982 11.1 6.4 251,483 24,343 9.7 6.9 247,046 23,328 9.4 6.5
Foreign
currency........ 0 0 0.0 0.0 0 0 0.0 0.0 0 0 0.0 0.0
--------- ------- --- --- --------- ------- --- --- --------- ------- --- ---
Total......... 259,999 28,982 11.1 6.4 251,483 24,343 9.7 6.9 247,046 23,328 9.4 6.5
========= ======= ========= ======= ========= =======
Other interest
bearing
liabilities
Ch$............. 78,038 4,136 5.3 0.8 83,752 4,165 5.0 2.3 38,203 5,290 13.8 10.7
UF.............. 103,819 13,076 12.6 7.7 94,213 9,825 10.4 7.6 150,421 10,629 7.1 4.1
Foreign
currency........ 90,510 4,269 4.7 8.7 113,098 4,257 3.8 15.9 127,978 3,232 2.5 8.3
--------- ------- --- --- --------- ------- --- --- --------- ------- --- ---
Total.......... 272,367 21,481 7.9 6.1 291,063 18,247 6.3 9.3 316,602 19,151 6.0 6.6
========= ======= ========= ======= ========= =======
Total interest
bearing liabilities
Ch$............. 447,862 38,940 8.7 4.0 536,061 34,827 6.5 3.8 649,358 32,227 5.0 2.1
UF.............. 938,203 99,194 10.6 5.8 995,952 80,533 8.1 5.4 945,881 67,811 7.2 4.3
Foreign
currency........ 154,942 7,776 5.0 9.0 248,246 9,492 3.8 15.9 420,690 7,412 1.8 7.5
--------- ------- --- --- --------- ------- --- --- --------- ------- --- ---
Total......... 1,541,007 145,910 9.5% 5.6% 1,780,259 124,852 7.0% 6.4% 2,015,929 107,450 5.3 4.3
========= ======= ========= ======= ========= =======
41
Year ended December 31,
--------------------------------------------------------------------------------------------------------------
2000 2001 2002
------------------------------------- ---------------------------------- -------------------------------------
Average Average Average Average Average Average
Average Interest nominal real Average Interest nominal real Average Interest nominal real
balance earned rate rate balance earned rate rate balance earned rate rate
--------- ------- ------- ------- ------- -------- ------- ------- --------- -------- -------- -------
(in millions of constant Ch$ of December 31, 2002, except for rate data)
NON-INTEREST BEARING
LIABILITIES
Non-interest
bearing demand
deposits
Ch$.............. 314,444 354,823 406,692
UF............... 16,456 11,454 12,097
Foreign
currency......... 7,679 11,770 550
--------- --------- ---------
Total........... 338,579 378,047 419,339
========= ========= =========
Contingent
liabilities
Ch$.............. 8,847 6,221 30,547
UF............... 19,057 18,988 3,162
Foreign
currency......... 33,818 44,520 39,942
--------- --------- ---------
Total........... 61,722 69,729 73,651
========= ========= =========
Other non-interest
bearing
liabilities
Ch$.............. 24,834 106,226 42,500
UF............... 0 0 50
Foreign currency. 21,799 36,593 48,906
--------- --------- ---------
Total........... 46,633 142,819 91,456
========= ========= =========
Shareholders'
equity
Ch$.............. 195,377 244,199 246,702
UF............... 0 0 0
Foreign currency. 0 0 0
--------- --------- ---------
Total........... 195,377 244,199 246,702
========= ========= =========
Total non-interest
bearing
liabilities and
shareholders'
equity
Ch$.............. 543,502 711,469 726,441
UF............... 35,513 30,442 15,309
Foreign currency. 63,296 92,883 89,398
--------- --------- ---------
Total........... 642,311 834,794 831,148
========= ========= =========
TOTAL LIABLITIES
AND SHAREHOLDERS'
EQUITY
Ch$.............. 991,364 38,940 1,247,530 34,827 1,375,799 32,227
UF............... 973,716 99,194 1,026,394 80,533 961,190 67,811
Foreign currency. 218,238 7,776 341,129 9,492 510,088 7,412
--------- ------- --------- ------- --------- -------
Total........... 2,183,318 145,910 2,615,053 124,852 2,847,077 107,450
========= ======= ========= ======= ========= =======
Changes in Net Interest Revenue and Interest Expense-Volume and Rate Analysis
The following tables allocate, by currency of denomination, changes in our net
interest revenue and interest expense between changes in the average volume of
interest earning assets and interest bearing liabilities and changes in their
respective nominal interest rates for 2002 compared to 2001 and for 2001
compared to 2000. Volume and rate variances have been calculated based on
movements in average balances over the period and changes in nominal interest
rates on average interest earning assets and average interest bearing
liabilities. The net change attributable to changes in both volume and rate has
been allocated to the change due to rate.
Increase (decrease) from Net change Increase (decrease) from Net change
2000 to 2001 due to from 2001 to 2002 due to from
changes in 2000 to 2001 changes in 2001 to 2002
------------------------ ------------ ------------------------ ------------
Volume Rate Volume Rate
------ ---- ------ ----
(in millions of constant Ch$ of December 2002)
INTEREST EARNING ASSETS
Interbank deposits
Ch$............................. 183 (168) 15 23 (73) (50)
UF.............................. 0 0 0 0 0 0
42
Increase (decrease) from Net change Increase (decrease) from Net change
2000 to 2001 due to from 2001 to 2002 due to from
changes in 2000 to 2001 changes in 2001 to 2002
------------------------ ------------ ------------------------ ------------
Volume Rate Volume Rate
------ ---- ------ ----
(in millions of constant Ch$ of December 2002)
Foreign currency................ (138) 177 39 59 (44) 15
------ ------- ----- ------ ------- ------
Total......................... 45 9 54 82 (117) (35)
====== ======= ===== ====== ======= ======
Investments
Ch$............................. 9,525 (1,971) 7,554 (667) (10,690) (11,357)
UF.............................. 18 (2,265) (2,247) (4,806) (5,769) (10,575)
Foreign currency................ 206 (5,107) (4,901) 19,572 5,622 25,194
------ ------- ----- ------ ------- ------
Total......................... 9,749 (9,343) 406 14,099 (10,837) 3,262
====== ======= ===== ====== ======= ======
Commercial loans
Ch$............................. 3,283 (2,580) 703 6,456 (4,736) 1,720
UF.............................. 1,510 (9,033) (7,523) (9,357) 12,892 3,535
Foreign currency................ 1,363 (3,147) (1,784) 2,897 2,881 5,778
------ ------- ----- ------ ------- -------
Total......................... 6,156 (14,760) (8,604) (4) 11,037 11,033
====== ======= ===== ====== ======= =======
Consumer loans
Ch$............................. 4,993 (904) 4,089 4,193 (2,238) 1,955
UF.............................. (90) (440) (530) 80 (291) (211)
Foreign currency................ 0 0 0 0 3 3
------ ------- ----- ------ ------- ------
Total......................... 4,903 (1,344) 3,559 4,273 (2,526) 1,747
====== ======= ===== ====== ======= ======
Mortgage loans
Ch$............................. 0 0 0 0 0 0
UF.............................. (1,500) 4,107 2,607 (144) (11,370) (11,514)
Foreign currency................ 0 0 0 0 0 0
------ ------- ----- ------ ------- ------
Total......................... (1,500) 4,107 2,607 (144) (11,370) (11,514)
====== ======= ===== ====== ======= =======
Foreign trade loans
Ch$............................. 0 0 0 507 0 507
UF.............................. 0 0 0 0 0 0
Foreign currency................ 2,192 (2,014) 178 235 (3,125) (2,890)
------ ------- ----- ------ ------- ------
Total......................... 2,192 (2,014) 178 742 (3,125) (2,383)
====== ======= ===== ====== ======= ======
Interbank loans
Ch$............................. (14) (134) (148) 58 501 559
UF.............................. 0 0 0 461 0 461
Foreign currency................ 0 1 1 0 0 0
------ ------- ----- ------ ------- ------
Total......................... (14) (133) (147) 519 501 1020
====== ======= ===== ====== ======= ======
Lease contracts
Ch$............................. 21 (478) (457) 36 (48) (12)
UF.............................. 1,034 (933) 101 (736) 405 (331)
Foreign currency................ (206) 302 96 (4) (841) (845)
------ ------- ----- ------ ------- ------
Total......................... 849 (1,109) (260) (704) (484) (1,188)
====== ======= ===== ====== ======= ======
Other outstanding loans
Ch$............................. 219 (7,789) (7,570) 317 4,512 4,829
UF.............................. 5,401 (3,422) 1,979 1,653 (7,497) (5,844)
Foreign currency................ 0 (3) (3) 0 0 0
------ ------- ----- ------ ------- ------
Total......................... 5,620 (11,214) (5,594) 1,970 (2,985) (1,015)
====== ======= ===== ====== ======= ======
Past due loans
Ch$............................. 46 (84) (38) 33 (2,298) (2,265)
UF.............................. 148 (120) 28 (1) (337) (338)
Foreign currency................ 0 (39) (39) 0 0 0
------ ------- ----- ------ ------- ------
Total.......................... 194 (243) (49) 32 (2,635) (2,603)
====== ======= ===== ====== ======= ======
Contingent loans
Ch$............................. (78) 62 (16) (3) 17 14
UF.............................. (1) 27 26 47 (98) (51)
Foreign currency................ 59 (26) 33 4 (10) (6)
------ ------- ----- ------ ------- ------
Total.......................... (20) 63 43 48 (91) (43)
====== ======= ===== ====== ======= ======
Total interest earning assets
Ch$............................. 18,178 (14,046) 4,132 10,953 (15,053) (4,100)
UF.............................. 6,520 (12,079) (5,559) (12,803) (12,065) (24,868)
Foreign currency................ 3,476 (9,856) (6,380) 22,763 4,486 27,249
------ ------- ----- ------ -------- -------
Total.......................... 28,174 (35,981) (7,807) 20,913 (22,632) (1,719)
====== ======= ===== ====== ======== =======
INTEREST BEARING LIABILITIES
Saving accounts
Ch$............................. 0 0 0 0 0 0
UF.............................. 166 (1,484) (1,318) 2 (922) (920)
Foreign currency................ 0 0 0 0 0 0
------ ------- ----- ------ ------- ------
43
Total.......................... 166 (1,484) (1,318) 2 (922) (920)
====== ======= ===== ====== ======= ======
Time deposits
Ch$............................. 2,513 (5,292) (2,779) 11,712 (5,358) 6,354
UF.............................. 5,080 (14,143) (9,063) (5,248) (4,919) (10,167)
Foreign currency................ 2,730 (1,007) 1,723 136 (2,629) (2,493)
------ ------- ----- ------ ------- ------
Total.......................... 10,323 (20,442) (10,119) 6,600 (12,906) (6,306)
====== ======= ===== ====== ======= ======
Central Bank borrowings
Ch$............................. 805 (37) 768 (255) (329) (584)
UF.............................. (167) (212) (379) (226) (56) (282)
Foreign currency................ 0 0 0 0 0 0
------ ------- ----- ------ ------- ------
Total.......................... 638 (249) 389 (481) (385) (866)
====== ======= ===== ====== ======= ======
Securities sold under agreements
to repurchase
Ch$............................. 2,264 (4,395) (2,131) (7,836) (1,659) (9,495)
UF.............................. 360 (371) (11) (1,070) (72) (1,142)
Foreign currency................ 0 0 0 1,441 3 1,444
------ ------- ----- ------ ------- ------
Total.......................... 2,624 (4,766) (2,142) (7,465) (1,728) (9,193)
====== ======= ===== ====== ======= ======
Mortgage finance bonds
Ch$............................. 0 0 0 0 0 0
UF.............................. (824) (3,815) (4,639) (419) (596) (1,015)
Foreign currency................ 0 0 0 0 0 0
------ ------- ----- ------ ------- ------
Total.......................... (824) (3,815) (4,639) (419) (596) (1,015)
====== ======= ===== ====== ======= ======
Other interest bearing liabilities
Ch$............................. 284 (255) 29 (6,307) 7,432 1,125
UF.............................. (1,002) (2,249) (3,251) 3,972 (3,168) 804
Foreign currency................ 850 (862) (12) 376 (1,401) (1,025)
------ ------- ----- ------ ------- ------
Total.......................... 132 (3,366) (3,234) (1,959) 2,863 904
====== ======= ===== ====== ======= ======
Total interest bearing liabilities
Ch$............................. 5,866 (9,979) (4,113) (2,686) 86 (2,600)
UF.............................. 3,613 (22,274) (18,661) (2,989) (9,733) (12,722)
Foreign currency................ 3,580 (1,869) 1,711 1,953 (4,027) (2,074)
------ ------- ----- ------ ------- ------
Total.......................... 13,059 (34,122) (21,063) (3,722) (13,674) (17,396)
====== ======= ===== ====== ======= ======
44
Interest Earning Assets--Net Interest Margin
The following table analyzes, by currency of denomination, our levels of
average interest earning assets and net interest, and illustrates the
comparative margins realized, for each of the periods indicated:
Year ended December 31,
--------------------------------------------------
2000 2001 2002
------------- ----------- ------------
(in millions of constant Ch$ of December 31, 2002,
except for percentages)
Total average interest earnings assets
Ch$.................................................. 394,000 558,756 684,874
UF................................................... 1,182,646 1,265,981 1,132,123
Foreign currency..................................... 283,884 386,236 626,475
--------- --------- ---------
Total.............................................. 1,860,530 2,210,973 2,443,472
========= ========= =========
Net interest earned(1)
Ch$.................................................. 26,078 34,323 32,823
UF................................................... 39,646 52,759 40,602
Foreign currency..................................... 14,356 6,260 35,589
--------- --------- ---------
Total.............................................. 80,080 93,342 109,014
========= ========= =========
Net interest margin(2)
Ch$.................................................. 6.62% 6.14% 4.79%
UF................................................... 3.35 4.17 3.59
Foreign currency..................................... 5.06 1.62 5.68
--------- --------- ---------
Total.............................................. 4.30% 4.22% 4.46%
========= ========= =========
- ----------------------
(1) Net interest earned is defined as interest revenue earned less interest
expense incurred.
(2) Net interest margin is defined as net interest earned divided by average
interest earning assets
Return on Equity and Assets
The following table presents certain of our selected financial ratios for
the periods indicated:
Year ended December 31,
--------------------------------------------------
2000 2001 2002
------------- ----------- ------------
(in millions of constant Ch$ of December 31, 2002,
except for percentages)
Net income.............................................. 14,904 15,335 20,255
Average total assets.................................... 2,183,322 2,615,052 2,847,078
Average shareholders' equity............................ 195,377 244,199 246,702
Net income as a percentage of:
Average total assets.................................... 0.68% 0.59% 0.71%
Average shareholders' equity............................ 7.63 6.28 8.21
Average shareholders' equity as a percentage of
average total assets................................ 8.95 9.34 8.67
Dividend paid ratio (percentage)(1)..................... 99.98 99.98 99.99
- ----------------------
(1) Calculated by dividing dividends declared per share by net income per share,
for each year.
45
Investment Portfolio
The following table sets forth our investments in Chilean government and
corporate securities and certain other investments as of December 31, 2000, 2001
and 2002. Investments which have a secondary market and a remaining maturity of
more than one year are carried at market value. All other investments are
carried at acquisition cost, plus accrued interest and UF indexation
adjustments, as applicable.
December 31,
2002 Weighted
Year ended December 31, Average
----------------------------------------------- -------------
2000 2001 2002 Nominal Rate
---------- --------- --------- -------------
(in millions of constant Ch$ of December 31, 2002)
Government securities:
Central Bank securities............................... 149,570 187,653 287,787 4.11
Subtotal............................................ 149,570 187,653 287,787 4.11
Investments purchased under agreements to resell......... 7,817 9,579 56,055 5.22
Investment collateral under agreements to repurchase:
Central Bank securities............................... 223,647 147,813 203,577 4.79
Negotiable time deposits in Chilean financial
institutions........................................ 22,621 21,286 16,704 4.50
Subtotal........................................... 246,268 169,100 220,281 4.77
Other investments:
Negotiable time deposits in domestic financial
institutions........................................ 2,808 15,589 43,353 4.40
Mortgage Finance Bonds issued by the Bank(1).......... 15,091 -- -- --
Other marketable securities........................... 73,509 8,345 38,404 2.89
Subtotal........................................... 91,408 23,934 81,757 3.69
------- ------- ------- ----
Total investments.................................. 495,063 390,266 645,880 2.88
======= ======= ======= ====
- ------------------
(1) Under US GAAP, mortgage finance bonds issued by us are not classified
as an asset but rather are offset against outstanding debt. The same applies
under Chilean GAAP since year 2002. Accordingly, outstanding mortgage finance
bonds issued as of December 31, 2002 and those issues as of December 31, 2001,
have been presented net of its corresponding liability. Outstanding mortgage
finance bonds issued prior to year 2001 have not been presented net of its
corresponding liability, the same presentation as in previous reports.
The above table includes Central Bank securities available for sale which
have the following maturity dates:
At December 31, 2002
------------------------
(in millions of constant
Ch$ of December 31, 2002)
Due in one year or less......................... 110,507
Due from one year to five years................. 99,813
-------
Total..................................... 210,320
=======
46
Loan Portfolio
The following table analyzes our loans by type of loan. Except where
otherwise specified, all loan amounts stated below are before deduction of
allowance for loan losses. Total loans reflect our loan portfolio, including
past due amounts.
1998 1999 2000 2001 2002
--------- --------- --------- --------- ---------
Commercial loans................... 620,073 621,307 685,665 819,362 828,522
Mortgage loans:
Residential loans.............. 187,921 176,850 159,140 146,864 146,153
Other.......................... 86,004 87,026 88,153 94,592 107,336
--------- --------- --------- --------- ---------
Subtotal.................... 273,925 263,876 247,293 241,456 253,489
Consumer loans..................... 95,963 127,971 154,772 176,114 204,589
Foreign trade loans................ 117,539 141,370 153,633 148,856 233,522
Interbank loans.................... 31,057 10,612 15,950 1,033 --
Lease contracts.................... 57,304 58,606 57,519 66,013 83,731
Other outstanding loans:
Lines of credit--individuals.... 29,891 18,359 19,306 17,309 17,759
Lines of credit--companies...... 18,649 22,906 49,002 16,201 36,235
Mortgages financed by Central
Bank lines of credit........ 12,450 9,279 6,954 6,420 3,646
Mortgages financed by the
Bank's general borrowings... 35,972 117,010 212,789 236,947 310,143
Other.......................... 793 926 1,404 5,611 907
--------- --------- --------- --------- ---------
Subtotal....................... 97,755 168,480 289,455 282,488 368,690
Past due loans..................... 24,903 25,475 30,375 38,653 41,330
--------- --------- --------- --------- ---------
Subtotal....................... 1,318,519 1,417,697 1,634,662 1,773,975 2,013,873
Contingent loans................... 58,850 63,608 69,824 67,184 84,691
--------- --------- --------- --------- ---------
Total loans................. 1,377,369 1,481,305 1,704,486 1,841,159 2,098,564
========= ========= ========= ========= =========
The loan categories are as follows:
Commercial loans are long-term and short-term loans made in Chilean pesos,
on an adjustable or fixed rate basis, primarily to finance working capital or
capital expenditures. Loans to individuals and businesses with terms that do not
meet the definitions of any of the other loan categories below are also included
in commercial loans. See "--Lines of Business".
Mortgage loans are principally inflation-indexed, fixed-rate, long-term
loans financed specifically by mortgage finance bonds, with monthly payments of
principal and interest collateralized by real property mortgages. At the time of
approval, the amount of a mortgage loan may not be more than 75% of the lower of
the purchase price or appraised value of the mortgaged property. Under Mortgage
loans, unless specified separately, we also include other mortgages ("Mutuos"),
which are inflation-indexed, fixed or variable-rate, long-term loans financed by
the Bank's general borrowing, with monthly payments of principal and interest
collateralized by real property mortgages. At the time of approval, the amount
of such mortgage loan usually does not exceed 80% of the lower of the purchase
price or appraised value of the mortgaged property. Residential mortgage loans
relate to loans to individuals for housing, and other mortgage loans are made to
finance the purchase of undeveloped land, office buildings and other real
estate. See "--Lines of Business". We recently launched a new product in which a
mortgage loan is complemented by a commercial loan that covers the remaining 20%
of the price of the property, thus allowing qualified clients to acquire the
property without any down payment. The product has received favorable reviews in
the market and was immediately copied by some competitors, but its effect in
business can not be established as yet.
Consumer loans are loans to individuals, made in Chilean pesos, generally
on a fixed rate basis, to finance the purchase of consumer goods or to pay for
services. They also include credit card balances financed by customers and thus
subject to interest charges. See "--Lines of Business--Retail Banking".
47
Foreign trade loans are fixed or variable rate, short-term loans made in
foreign currencies (principally US$) to finance imports and exports. See
"--Lines of Business--Corporate Banking".
Interbank loans are fixed-rate, short-term loans to financial institutions
that operate in Chile.
Lease contracts are agreements for direct financing leases relating to
capital equipment and other property.
Other outstanding loans include checking account lines of credit, bills of
exchange and mortgage loans which are financed by our general borrowings (as
opposed to mortgage finance bonds).
Past due loans include, with respect to any loan, the amount of principal
or interest that is 90 or more days overdue, and the entire outstanding balance
of any loan is recorded under past due loans once legal collection proceedings
have been commenced.
Contingent loans consist of guarantees granted by a bank's in Ch$, UF and
foreign currencies (principally US$), as well as outstanding and undrawn letters
of credit. Unlike US GAAP, Chilean GAAP requires such loans to be included on a
bank's balance sheet.
Any collateral provided generally consists of a mortgage on real estate or
a pledge of marketable securities, third party letters of credit, equipment or
inventory. The existence and amount of collateral generally vary from loan to
loan.
Risks of the Loan Portfolio
Our management believes that certain of our principal loan products have
the following risk characteristics:
Commercial Loans. Our loans for working capital, capital expenditures and
similar purposes have experienced a decrease in the risk index from 2.05% at
December 31, 2001 to 1.79% at December 31, 2002.
The variation in the risk index of our commercial loan portfolio is
attributable mainly to a decrease in the volume of B- category loans as a
percentage of total loans, from 4.1% in 2001 to 3.6% in 2002 and to a decrease
in the volume of C category loans as a percentage of total loans, from 1.2% in
2001 to 0.9% in 2002 . We experienced such decreases despite our policy, applied
since the third quarter of 1998, of acknowledging all real and potential risk in
loans and of assigning loan classifications according to the most unfavorable
projections. See "--Competition--Risk Index". The quality of our commercial loan
portfolio was adversely affected by a decrease in the rate of growth of the
Chilean economy during the years 1998 and 1999, a sharp increase in interest
rates between late 1997 and September 1998, and an increase in the general level
of indebtedness of our customers due to the economic crisis of 1998-1999, from
which there has been no clear recovery yet. Nevertheless, the stabilization of
the economic conditions has resulted in a slow improvement on the quality of our
loan portfolio. The quality of our commercial loan portfolio is likely to be
adversely affected in the future by a decrease in the rate of growth of the
Chilean economy, an increase in interest rates, or an increase in the general
level of indebtedness of our customers and regulatory changes (such as tax rules
and labor regulations) that could impose additional operating costs on Chilean
companies or on companies operating in certain sectors of the Chilean economy.
Mortgage Loans. Our mortgage loans have shown a level of risk which has
ameliorated from 0.85% at December 31, 2001 to 0.72% at December 31, 2002.
The quality of our mortgage loan portfolio has been adversely affected by
the unfavorable conditions of the Chilean economy, favorably affected by a
decrease in interest rates, and adversely affected by an increase in the general
level of indebtedness of our customers due to the economic conditions prevailing
over the year. As economic conditions became stable, even though the level of
economic activity is still depressed, the quality of our mortgage loan portfolio
has begun a slow recovery.
Chilean banking regulations currently limit the amount of a residential
mortgage loan financed by a Mortgage Finance Bond to 75% of the value of the
property. If the loan is not financed by a Mortgage Finance Bond it can
48
finance up to 80% of the value of the property. Such value is established by the
regulations as the lesser of (i) the purchase price of the property securing the
loan, and (ii) the appraised value of such property. In addition, our policy is
not to make a residential mortgage loan if the monthly payments on such loan
exceed 25% of the household's monthly after-tax income.
Consumer Loans. The level of risk in our consumer loans has increased from
approximately 2.47% at December 31, 2001 to approximately 2.85% at December 31,
2002. Such increase in the risk level of our consumer loans is a consequence of
a year where the unemployment rate increased and the level of economic activity
in the Chilean economy remained depressed, and is due, among other factors, to
the unfavorable economic conditions.
The risks associated with both residential mortgage and consumer loans are
affected by, among other things, the following variables: the unemployment rate,
changes in real salaries, the level of economic activity and the overall level
of credit in the Chilean economy. These indices affect both high income and
lower and middle-income individuals but have an earlier impact on the latter
sector. Consumer credit risk also depends on the quality of financial
information obtained about the individual debtor. We receive relevant credit
information from DICOM with respect to existing and potential customers.
Foreign Trade Loans. Our loans for foreign trade are made to finance
working capital requirements of exporters and importers and, accordingly, risk
factors are similar to commercial loans for working capital. Additional
variables which specifically affect risk for our foreign trade loans include
fluctuations in real exchange rates and international commodity prices as well
as international foreign trade policies (including tariffs and other barriers).
Leasing. The risk index from our leasing operations has not exceeded 4.14%
at the end of each of the previous five years and at December 31, 2002 was
approximately 2.08%
Maturity and Interest Rate Sensitivity of Loans
The following table sets forth an analysis by type and time remaining to
maturity of our loans at December 31, 2002:
Due after Due after Due after Due after
Balance at 1 month 6 months 1 year 3 years
December 31, Due within but within but within but within but within Due after
2002 1 month 6 months 12 months 3 years 5 years 5 years
------------ ---------- ---------- ---------- ---------- ---------- ---------
(in millions of constant Ch$ of December 31, 2002)
Commercial loans........ 828,522 189,071 207,108 114,256 112,045 148,175 57,867
Mortgage loans:
Residential ......... 146,154 1,478 5,752 7,168 25,406 21,481 84,869
Other................ 107,336 1,107 3,841 4,693 17,557 17,569 62,569
--------- ------- ------- ------- ------- ------- -------
Subtotal........... 253,489 2,584 9,593 11,861 42,963 39,050 147,438
Consumer loans.......... 204,589 14,960 21,045 24,143 80,698 46,846 16,897
Foreign trade loans..... 233,522 55,403 102,744 24,368 5,910 24,371 20,724
Interbank loans......... -- -- -- -- -- -- --
Lease contracts......... 83,731 1,354 8,222 8,898 26,725 21,975 16,557
Other outstanding loans. 368,690 4,368 41,129 11,607 29,536 20,327 261,723
Past due loans.......... 41,330 41,330 -- -- -- -- --
--------- ------- ------- ------- ------- ------- -------
Subtotal........... 2,013,873 309,072 389,841 195,133 297,877 300,744 521,206
Contingent loans........ 84,691 12,932 41,771 16,632 12,245 1,101 10
--------- ------- ------- ------- ------- ------- -------
Total loans........ 2,098,564 322,003 431,612 211,765 310,122 301,845 521,216
========= ======= ======= ======= ======= ======= =======
49
The following table presents the interest rate sensitivity of our
outstanding loans due after one year as of December 31, 2002 (not including
contingent loans). See also "Operating and Financial Review and Prospects--Asset
and Liability Management--Interest Rate Sensitivity."
At December 31, 2002
-------------------------
(in millions of constant
Ch$ of December 31, 2002)
Variable rate
Ch$ .............................................. 5,315
UF ............................................... 244,805
Foreign currency.................................. 35,946
---------
Total........................................... 286,066
Fixed rate
Ch$ .............................................. 168,201
UF ............................................... 526,979
Foreign currency.................................. 138,581
Total........................................... 833,761
---------
Total........................................ 1,119,827
=========
Loans by Economic Activity
The following table sets forth at the dates indicated an analysis of our
loan portfolio based on the borrower's principal economic activity. Loans to
individuals for business purposes are allocated to their economic activity. The
table includes outstanding contingent loans amounting to Ch$63,608 million in
1999, Ch$69,824 million in 2000, Ch$67,184 million in 2001 and Ch$84,691 million
in 2002.
At December 31, 2002
---------------------------------------------------------------------------------
2000 2001 2002
------------------------- ------------------------- -----------------------
Percentage Percentage Percentage
Loan of loan Loan of loan Loan of loan
portfolio portfolio portfolio portfolio portfolio portfolio
--------- ---------- --------- ---------- --------- ----------
(in millions of constant Ch$ of December 31, 2000 except for percentages)
AGRICULTURE, LIVESTOCK, FORESTRY, FISHING
Agriculture.............................. 34,485 2.02% 35,727 1.94% 40,856 1.95%
Livestock................................ 11,702 0.69% 11,130 0.60% 18,768 0.89%
Forestry................................. 2,711 0.16% 2,300 0.12% 2,186 0.10%
Fishing.................................. 17,931 1.05% 34,038 1.85% 38,189 1.82%
------ ------ ------ ------ ------ ------
Subtotal............................... 66,829 3.92% 83,195 4.52% 99,999 4.77%
MINING
Coal, stone and clay extraction.......... 2,232 0.13% 215 0.01% 9745 0.46%
Metallic mineral extraction.............. 3,934 0.23% 16,335 0.89% 56,296 2.68%
Extraction of other minerals............. 391 0.02% 10545 0.57% 10598 0.51%
------ ------ ------ ------ ------ ------
Subtotal............................... 6,557 0.38% 27,095 1.47% 76,639 3.65%
MANUFACTURING
Automobile industry...................... 2,105 0.12% 1,523 0.08% 505 0.02%
Food, beverages and tobacco.............. 45,052 2.64% 40,892 2.22% 67,076 3.20%
Textiles, clothing and leather goods..... 17,534 1.03% 14,750 0.80% 6,432 0.31%
Wood and wood products, including
furniture.............................. 9,443 0.55% 8,192 0.44% 35,535 1.69%
Paper, paper products, printing and
publishing............................. 10,730 0.63% 11,225 0.61% 30,589 1.46%
Chemical products derived from oil,
coal, rubber and plastic............... 9,171 0.54% 13,608 0.74% 14,463 0.69%
Production of non-mineral products....... 2,707 0.16% 6,956 0.38% 4,056 0.19%
Basic metal industries................... 15,126 0.89% 12,543 0.68% 11,653 0.56%
Production of machines, equipment and
other metal goods...................... 13,429 0.79% 9,576 0.52% 16,674 0.79%
Other manufacturing industries........... 14,000 0.82% 2,419 0.13% 642 0.03%
------ ------ ------ ------ ------ ------
50
At December 31, 2002
---------------------------------------------------------------------------------
2000 2001 2002
------------------------- ------------------------- -----------------------
Percentage Percentage Percentage
Loan of loan Loan of loan Loan of loan
portfolio portfolio portfolio portfolio portfolio portfolio
--------- ---------- --------- ---------- --------- ----------
(in millions of constant Ch$ of December 31, 2000 except for percentages)
Subtotal............................... 139,297 8.17% 121,684 6.61% 187,625 8.94%
ELECTRICITY, GAS AND WATER
Electricity, gas and steam............... 29,287 1.72% 41,892 2.28% 64,669 3.08%
Collection and distribution of water..... 27,894 1.64% 29,568 1.61% 29,376 1.40%
--------- ------ --------- ------ --------- ------
Subtotal................................. 57,181 3.35% 71,460 3.88% 94,045 4.48%
CONSTRUCTION
Residential buildings.................... 146,291 8.58% 113,943 6.19% 114,984 5.48%
Non-residential buildings................ 55,099 3.23% 77,714 4.22% 20,381 0.97%
Other constructions...................... 20,980 1.23% 13,570 0.74% 35,536 1.69%
--------- ------ --------- ------ --------- ------
Subtotal............................... 222,370 13.05% 205,227 11.15% 170,901 8.14%
TRADE
Wholesale................................ 16,564 0.97% 25,230 1.37% 32,038 1.53%
Retail................................... 64,918 3.81% 112,898 6.13% 123,503 5.89%
Restaurants and hotels................... 6,187 0.36% 6,273 0.34% 9,534 0.45%
Imports.................................. 53,800 3.16% 51,291 2.79% 27,339 1.30%
Exports.................................. 37,899 2.22% 32,696 1.78% 25,225 1.20%
--------- ------ --------- ------ --------- ------
Subtotal............................... 179,368 10.52% 228,388 12.40% 217,639 10.37%
TRANSPORT, STORAGE AND COMMUNICATIONS
Transport and storage.............. 18,047 1.06% 23,363 1.27% 59,787 2.85%
Communications..................... 40,341 2.37% 28,739 1.56% 5,300 0.25%
--------- ------ --------- ------ --------- ------
Subtotal......................... 58,388 3.43% 52,102 2.83% 65,087 3.10%
FINANCIAL SERVICES
Financial companies................ 145,202 8.52% 129,661 7.04% 107,883 5.14%
Insurance.......................... 1,416 0.08% 14,001 0.76% 725 0.03%
Real estate........................ 79,249 4.65% 84,742 4.60% 79,902 3.81%
--------- ------ --------- ------ --------- ------
Subtotal......................... 225,867 13.25% 228,404 12.41% 188,510 8.98%
SERVICES
Public administration and defense.. 8,203 0.48% 7,126 0.39% 5,627 0.27%
Health services.................... 3,268 0.19% 3,487 0.19% 3,661 0.17%
Social services.................... 36,875 2.16% 38,036 2.07% 101,212 4.82%
Leisure services................... 2,215 0.13% 2,230 0.12% 1,608 0.08%
Personal and home services......... 15,335 0.90% 7,905 0.43% 4,533 0.22%
International organizations........ 4 0.00% 2 0.00% 3 0.00%
Enterprise services................ 131,667 7.72% 125,949 6.84% 81,693 3.89%
Other services..................... 14,000 0.82% 67,794 3.68% 139,998 6.67%
--------- ------ --------- ------ --------- ------
Subtotal......................... 211,567 12.40% 252,529 13.72% 338,335 16.12%
INDIVIDUALS
Consumer loans..................... 155,422 9.12% 178,306 9.68% 205,029 9.77%
Residential mortgage loans......... 381,640 22.39% 392,769 21.33% 454,755 21.67%
--------- ------ --------- ------ --------- ------
Subtotal......................... 537,062 31.51% 571,075 31.02% 659,784 31.44%
TOTAL................................. 1,704,486 100.00% 1,841,159 100.00% 2,098,564 100.00%
========= ====== ========= ====== ========= ======
Foreign Country Loans Outstanding
Our cross-border loans are principally trade-related. These include loans
to foreign financial institutions, principally under the ALADI payments system.
ALADI is a series of arrangements among Latin American countries designed to
facilitate trade financing by providing to a cross-border lender in a
participating country the guarantee of its own central bank of amounts due in
connection with a qualifying transaction. At December 31, 2002, no outstanding
loans to Brazilian borrowers and approximately 0.03% of our outstanding loans to
foreign borrowers were under the ALADI programs and, accordingly, were
guaranteed by the Central Bank. These percentages are similar to those observed
in 2001 due to an overall decrease in foreign country loans. The Bank has a
policy of decreasing its exposure to Brazil and Argentina.
51
2000 2001 2002
---- ---- ----
(in millions of constant Ch$ of December 31, 2002)
Argentina.................................... 4,396 22,091 9,782
Brazil....................................... 33,572 30,358 26,749
Cayman Island................................ - 16,970 18,760
Peru......................................... 92 139 166
Venezuela.................................... 5,673 12,432 12,108
Mexico....................................... 246 233 350
Costa Rica................................... 4,975 4,973 4,320
Italia 45 188 31
Colombia..................................... 29 25 97
South Korea ................................. 4,020 - 3,174
Aruba........................................ - 7,442 -
China........................................ - 3,174 -
United States of America..................... 728 - 3,776
Uruguay...................................... - 11,510 8,549
Other........................................ 1,071 1,557 130
------ ------- ------
Total................................... 54,847 111,092 87,992
====== ======= ======
The following table shows the changes in aggregate outstanding loans to
borrowers in Brazil during the year ended December 31, 2002:
(in millions of constant
Ch$ of December 31, 2002)
-------------------------
Aggregate outstanding loans at January 1, 2002..... 30,358
Net change in short-term loans..................... (181)
Changes in other loans:
Additional outstanding....................... 26,930
Interest income accrued...................... -
Collections of:
Principal.................................. (30,377)
Accrued interest........................... 19
Other changes................................ -
--------
Aggregate outstanding loans at December 31, 2002... 26,749
========
We also maintain deposits abroad (primarily demand deposits) as needed to
conduct our foreign trade transactions. The table below lists the largest
amounts of foreign deposits by country for the years ended December 31, 2000,
2001 and 2002:
Year ended December 31, 2002
--------------------------------------------
2000 2001 2002
---- ---- ----
(in millions of constant Ch$ of December 31,
2002)
United States.............. 4,396 36,042 731
Germany.................... 22 81 97
Spain...................... 1,552 485 338
United Kingdom............. 55 32 82
Canada..................... 2 1 1
France..................... 6 2 -
Japan...................... - - 1,732
Other...................... 41 104 74
----- ------ -----
52
Year ended December 31, 2002
--------------------------------------------
2000 2001 2002
---- ---- ----
(in millions of constant Ch$ of December 31,
Total...................... 6,074 36,747 3,055
===== ====== =====
Credit Approval Process
We manage our credit risks in accordance with policies and rules developed
by the Credit Division and approved by the General Manager and the Board of
Directors. The policies and rules, which are set forth in our credit manual,
define, among other factors, (i) the responsibilities of the various units
participating in the credit approval process, (ii) the business segments and
markets which constitute our strategic targets, (iii) quantitative and
qualitative standard by business area (e.g., corporate banking, retail banking,
international operations), and (iv) the composition of the committee responsible
for the approval of each transaction.
Until September 1998 the policies and rules in effect were the following:
In the case of credit applications by companies, the evaluation was
conducted by the Credit Analysis division and the relevant commercial division
taking into account quantitative and qualitative factors. Credit analysis and
evaluation of a customer's risk continued during the term of the loan.
In the case of retail banking transactions, the most relevant parameters
used to evaluate an applicant's credit risk were (i) income and net worth, (ii)
seniority at employment, (iii) professional and academic qualifications, (iv)
indebtedness and credit reports, and (v) liquidity, measured in terms of
percentage of monthly income required to service indebtedness.
Once the evaluation of an application had been completed, the decision was
adopted by different committees, depending upon our total risk exposure to the
borrower and related parties, the amount of credit requested and the quality and
value of the collateral provided.
Any transaction as a result of which a customer's total risk exposure would
exceed Ch$400 million, as well as transactions involving amounts between Ch$300
million and Ch$400 million requested by an applicant that was not one of our
customers, had to be reviewed by the Credit Committee, which consisted of the
General Manager and at least three members of the Board of Directors.
The following table lists our committees from which credit approval was
required depending upon total risk exposure:
Limit in Millions of Ch$(1)
-------------------------------------------------------------
Level Approved by: Without Collateral "A" Collateral(2) "B" Collateral(2)
----- ------------ ------------------ ----------------- -----------------
1. Credit Committee(3)...................... Above 300 or 400 Above 300 or 400 Above 300 or 400
2. General Manager's Committee(3)........... Up to 300 or 400 Up to 300 or 400 Up to 300 or 400
3. Manager's Committee...................... 200 200 200
4. Area Executive Committee................. 120 120 120
5. Area Committee........................... 90 90 90
6. Branches Executive Committee............. 60 60 60
7. Branches Credit Committee................ 30 40 50
8. Branches Internal Committee.............. 10 20 30
9. Deputy Branch Manager.................... 15 25 50
10. Level 1--Local Branch Committee.......... 10 20 50
11. Level 2--Local Branch Committee.......... 8 16 40
12. Level 3--Local Branch Committee.......... 6 12 30
13. Level 4--Local Branch Committee.......... 4 8 20
14. Level 5--Local Branch Committee.......... 3 6 15
53
- ----------------------
(1) Amount limits were determined on the basis of total risk: direct debt,
indirect debt and affiliated party debt.
(2) "A" Collateral: mortgages on real estate, or pledges of term deposits or
similar instruments. "B" Collateral all pledges on properties other than
real estate and liquid securities.
(3) In Levels 1 and 2, the limit depended upon whether a series of conditions
had been previously met.
The composition of each of the above approving committees was as follows :
Credit Committee Board Directors/General Manager
General Manager's Committee Commercial Area Manager/General Manager or Branches Area Manager/Credit
Risk Manager
Managers Committee Commercial Area Manager/Branches Area Manager/Credit Risk Manager
Area Executive Committee Commercial Area Manager or Branches Area Manager/Credit Risk Manager
Area Committee Branches Assistant Manager/Credit Risk Assistant Manager
Branches Executive Committee Branches Assistant Manager/Credit Analysis Director
Branches Credit Committee Agent/Credit Analysis Director
Branches Internal Committee Agent/Credit Analysis Coordinator
Level 1-5--Local Branch Committee Account Manager/Agent
After all conditions had been met and credit had been extended, we
maintained a surveillance of the loan portfolio to determine the level of risk
of its loans. This review was conducted by account managers, analysts and
control committees on the basis of information available in our database as well
as external information such as that provided by DICOM. The purpose of this
review was to evaluate, during the term of a loan, our overall credit risk, the
financial condition of the borrowers and the risk classification in accordance
with the regulations of the Superintendency of Banks. After a payment in an
amount equal to or greater than Ch$2 million became overdue, the loan became
subject to continuous review by a control committee comprised of officers of the
Commercial Area and the Credit Risk Division.
The acquisition by BBV in September 1998 of a controlling shareholding
interest in BBVA Chile., formerly known as Banco BHIF (see "The Acquisition"),
implied a change in our credit risk policies and rules. Our credit risk policies
and rules in effect after that date are as follows:
In the case of credit applications by companies, the evaluation is
conducted by the credit admission committee taking into account quantitative and
qualitative factors. See "--Lines of Business--Corporate Banking". Credit
analysis and evaluation of a customer's risk continue during the term of the
loan.
In the case of retail banking transactions, the most relevant parameters
used to evaluate an applicant's credit risk are (i) income and net worth, (ii)
seniority at employment, (iii) professional and academic qualifications, (iv)
indebtedness and credit reports, and (v) liquidity, measured in terms of
percentage of monthly income required to service indebtedness.
Once the evaluation of an application has been completed, the decision is
adopted by different committees, depending upon our total risk exposure to the
borrower and related parties, the amount of credit requested and the quality and
value of the collateral provided.
The following table lists our committees from which credit approval is
required depending upon total risk exposure:
Limit in Millions of Ch$(1)
-------------------------------------------------------------
Level(3) Approved by: Without Collateral "B" Collateral(2) "A" Collateral(2)
-------- ------------ ------------------ ----------------- -----------------
1. Sectorial Analysis & Risk Management
Committee (A.S.G.R.C) (Spain)............ Above 2,500 Above 2,500 Above 2,500
2. General Manager's Committee( CTO)........... Up to 7,000 Up to 7,000 Up to 7,000
3. Risk Division's Committee (CRD)............. Up to 5,000 Up to 5,000 Up to 5,000
54
Limit in Millions of Ch$(1)
-------------------------------------------------------------
Level(3) Approved by: Without Collateral "B" Collateral(2) "A" Collateral(2)
-------- ------------ ------------------ ----------------- -----------------
4. Treasury and Fund Adm. Manager.............. Up to 1,500 Up to 1,500 Up to 1,500
4. Corporate Banking Manager................... Up to 250 Up to 250 Up to 250
4. Commercial and Personal Banking
Division Manager......................... Up to 250 Up to 250 Up to 250
4. Commercial Banking Area Manager............. 25 50 100
4. Branches (Commercial Banking)............... 10/20 25/40 50/75
4. Branches (Personal Banking)................. 2/8 5/20 15/40
- ----------------------
(1) Amount limits are determined on the basis of total risk: direct debt,
indirect debt and affiliated party debt.
(2) "A" Collateral: mortgages on real estate, or pledges of term deposits or
similar instruments. "B" Collateral: all pledges on properties other than
real estate and liquid securities.
(3) In Level 1, the limit depends upon whether a series of conditions have been
previously met. In Level 4 the limit depends upon whether the client is a
firm or an individual, upon the specific area involved and upon the branch
category. There are 3 categories for Commercial Banking Branches and 5
categories for Personal Banking Branches.
The composition of each of the above approving committees is as follows :
Sectorial Analysis & Risk Management Committee BBVA Group's Risk Assessment Division
(A.S.G.R.C) (Spain)
General Manager's Committee: CEO/Commercial Manager/Corporate Manager Treasury & Fund
Manager/Credit Risk Manager
Risk Division's Committee: Credit Risk Manager/Commercial Admission Manager/
Corporate Admission Manager /Personal Banking Admission
Manager/Risk Monitoring Manager
Branch, Area or Division Committee: Branch, Area or Division Manager /Account Executive
After all conditions have been met and credit has been extended, we
maintain a surveillance of the loan portfolio to determine the level of risk of
its loans. This review is conducted by specialized analysts on the basis of
information available in our database as well as external information such as
that provided by DICOM. The purpose of this review is to evaluate, during the
term of a loan, our overall credit risk, the financial condition of the
borrowers and the risk classification in accordance with the regulations of the
Superintendency of Banks. After a payment in an amount equal or greater than
Ch$2 million becomes overdue, the loan becomes subject to continuous review by a
control committee comprised of officers of our Credit Risk Division.
Classification of Loan Portfolio
Chilean banks are required to classify their outstanding exposures on an
ongoing basis for the purpose of determining the amount of allowance for loan
losses. The guidelines used by Chilean banks for such classifications are
established by the Superintendency of Banks, although banks are given some
latitude in devising more stringent classification systems within such
guidelines. For purposes of classification, loans are divided into consumer
loans, residential mortgage loans and commercial loans. The Superintendency of
Banks regularly examines and evaluates each financial institution's credit
management process, including its compliance with the loan classification
guidelines, and on that basis classifies banks and other financial institutions
into one of three categories, I, II or III. Category I is reserved for
institutions that fully comply with the loan classification guidelines.
Institutions are rated in Category II if their loan classification system
reveals deficiencies that must be corrected by the bank's management. Lastly,
Category III indicates significant deviations from the Superintendency of Banks'
guidelines that clearly reflect inadequacies in the evaluation of the risk and
estimated losses associated with loans. We have been classified in Category I
since 1992.
Consumer Loans: Include financing arising from the use of credit cards and
loans granted to individuals. Their purpose is to finance the acquisition of
consumer goods and payment of services in an amount that does not exceed
55
UF 550. Their repayment is generally made in equal monthly installments.
Consumer loans also include loans related to the use of credit cards.
Residential Mortgage Loans: Include loans for residential purposes that are
currently funded through the issuance by BBVA Chile of Mortgage Finance Bonds.
Generally, the purpose of these loans is to finance the acquisition,
improvement, restoration or construction of a residential home. They are granted
to the final user of the property and the collateral covers the entire credit.
All the remaining mortgage loans, in particular those granted for general
purposes, are considered as commercial loans.
Commercial Loans: Include all loans other than consumer loans and
residential mortgage loans.
In the case of consumer loans and residential mortgage loans, the
classification is determined by the extent to which payments are overdue. In the
case of commercial loans, the classification is based on the estimated losses on
all of the loans outstanding to the borrower, as determined by us. Residential
mortgage loans are classified A, B or B- (except for loans purchased from the
Asociacion de Ahorro y Prestamos ("ANAP"), the former Chilean savings and loans
association, which may be rated as C or D). Consumer and commercial loans are
classified in five categories as follows:
Required
Classification Commercial Loans (1) Residential Mortgage Loans Consumer Loans Provisions(2)
- -------------- -------------------- -------------------------- -------------- -------------
"A" Loans which are not expected to Interest and principal Interest and principal 0%
default payments are current payments are current
"B" Loans with probability of Payments are up to 6 Payments are up to 1 1%
default of less than 5% months overdue month overdue
"B-" Loans with probability of Payments are over 6 Payments are overdue by 20%
default between 5% and 39% months overdue 1 to 2 months
"C" Loans with probability of Not applicable(3) Payments are overdue by 60%
default between 40% and 79% 2 to 4 months
"D" Loans with probability of Not applicable(3) Payments are overdue by 90%
default between 80% and 100% over 4 months
- ----------------------
(1) We determine the "potential loss" of commercial loans based on (i) the
financial condition of the customer; (ii) the past payment behavior of the
customer; (iii) the collateral or guarantee, if any, provided to us in
connection with the loan and the market or liquidation value of such
collateral or guarantee; and (iv) the outlook for the economic sector or
industry in which the customer is engaged in its business activities.
(2) Certain commercial loans in excess of UF 25,000 classified as "A" or "B"
are deemed to present an additional level of risk and thus require an
additional allowance of 5% of the aggregate amount of such loans, even if
there is no evident loss. The additional level of risk is deemed to exist
when such loans cover over 50% of the total financing of a project or when
the loan term exceeds three years and no guarantees exist in addition to
those related directly to the project.
(3) These categories are not applicable to residential mortgage loans, except
in the case of loans acquired from the Asociacion Nacional de Ahorro
(National Association of Savings and Loans or "ANAP"). ANAP loans may have
additional levels of risk and thus require an allowance of between 40% and
79% in category "C" and greater than 79% in category "D".
The loan classification guidelines of the Superintendency of Banks
applicable to commercial loans require that we classify the greater of (i) the
commercial loans outstanding to our 400 largest debtors or (ii) the commercial
loans outstanding to the number of our largest debtors whose commercial loans
aggregate at least 75% of the total amount of loans included in our commercial
loan portfolio. Such guidelines also require that our classify 100% of our
residential mortgage loans and 100% of our consumer loans. For these purposes,
the loan amount includes outstanding principal (whether or not past due) and
accrued and unpaid interest.
56
Analysis of our Loan Classifications
The following tables provide statistical data regarding the classification
of our loans at the end of each of the last five years. As previously indicated,
the Superintendency of Banks requires that we prepare a risk analysis that
evaluates, for classification purposes only, a portion (but in no event less
than 75%) of our total commercial loan portfolio, including past due and
contingent loans.
At December 31, 1998
---------------------------------------------------------------------------------------
Residential Percentage of
Commercial Consumer mortgage evaluated
Category loans loans loans Total loans loans
- ------------------------------ ---------- -------- --------------------- ----------- --------------
(in millions of constant Ch$ of December 31, 2002, except for percentages)
A............................. 674,801 78,418 205,999 959,218 75.41%
B............................. 223,702 10,650 27,257 261,609 20.57
B-............................ 23,783 3,112 5,899 32,793 2.58
C............................. 11,936 2,718 516 15,170 1.19
D............................. 1,352 1,916 0 3,268 0.25
--------- ------ ------- --------- ------
Total of evaluated loans...... 935,574 96,814 239,671 1,272,058 100.00%
========= ====== ======= ========= ======
Total loans................... 1,040,883 96,814 239,671 1,377,366
========= ====== ======= =========
Percentage evaluated....... 89.88% 100.00% 100.00% 92.35%
At December 31, 1999
---------------------------------------------------------------------------------------
Residential Percentage of
Commercial Consumer mortgage evaluated
Category loans loans loans Total loans loans
- ------------------------------ ---------- -------- --------------------- ----------- --------------
(in millions of constant Ch$ of December 31, 2002, except for percentages)
A............................. 636,808 111,145 273,246 1,021,199 74.21%
B............................. 242,649 10,467 27,528 280,644 20.39
B-............................ 36,186 2,529 9,481 48,196 3.50
C............................. 18,836 2,262 464 21,561 1.57
D............................. 2,158 2,349 0 4,507 0.33
--------- ------- -------- ---------- ------
Total of evaluated loans... 936,637 128,752 310,718 1,376,107 100.00%
========= ======= ======== ========== ======
Total loans................ 1,041,837 128,752 310,718 1,481,304
========= ======= ======== ==========
Percentage evaluated....... 89.90% 100.00% 100.00% 92.90%
At December 31, 2000
---------------------------------------------------------------------------------------
Residential Percentage of
Commercial Consumer mortgage evaluated
Category loans loans loans Total loans loans
- ------------------------------ ---------- -------- --------------------- ----------- --------------
(in millions of constant Ch$ of December 31, 2002, except for percentages)
A............................. 758,654 138,781 337,206 1,234,793 77.54%
B(1).......................... 227,181 10,131 33,242 270,554 16.99
B-............................ 48,737 2,632 10,941 62,309 3.91
C............................. 13,290 2,128 402 15,820 0.99
D............................. 7,273 1,750 0 9,023 0.57
--------- ------- ------- --------- ------
Total of evaluated loans... 1,055,134 155,422 381,790 1,592,499 100.00%
========= ======= ======== ========== ======
Total loans................ 1,167,121 155,422 381,790 1,704,486
========= ======= ======== ==========
Percentage evaluated....... 90.40% 100.00% 100.00% 93.43%
57
At December 31, 2001
---------------------------------------------------------------------------------------
Residential Percentage of
Commercial Consumer mortgage evaluated
Category loans loans loans Total loans loans
- ------------------------------ ---------- -------- --------------------- ----------- --------------
(in millions of constant Ch$ of December 31, 2002, except for percentages)
A............................. 822,422 152,633 336,719 1,311,774 76.25%
B............................. 261,817 15,139 42,103 319,059 18.55
B-............................ 49,640 4,230 13,581 67,451 3.92
C............................. 13,933 2,726 365 17,024 0.99
D............................. 3,047 1,913 0 4,959 0.29
--------- ------- ------- --------- ------
Total of evaluated loans... 1,150,858 176,641 392,768 1,720,267 100.00%
--------- ------- ------- --------- ======
Total loans................ 1,271,751 176,641 392,768 1,841,160
========= ======= ======= =========
Percentage evaluated....... 90.49% 100.00% 100.00% 93.43%
At December 31, 2002
---------------------------------------------------------------------------------------
Residential Percentage of
Commercial Consumer mortgage evaluated
Category loans loans loans Total loans loans
- ------------------------------ ---------- -------- --------------------- ----------- --------------
(in millions of constant Ch$ of December 31, 2002, except for percentages)
A............................. 935,376 171,631 394,997 1,502,379 76.34%
B............................. 307,814 22,362 46,341 376,517 19.14%
B-............................ 48,373 4,750 13,109 66,232 3.37%
C............................. 11,444 3,762 308 15,514 0.79%
D............................. 4,518 2,673 0 7,191 0.37%
--------- ------- ------- --------- ------
Total of evaluated loans... 1,307,525 205,178 454,755 1,967,833 100.00%
========= ======= ======= ========= ======
Total loans................ 1,438,256 205,178 454,755 2,098,564
--------- ------- ------- ---------
Percentage evaluated....... 90.91% 100.00% 100.00% 93.77%
- ----------------------
(1) Includes category B loans which are subject to an allowance equivalent to
5% of the balance due in accordance with regulations of the Superintendency
of Banks. Such loans are none as of December 31, 2002 See "--Classification
of Loan Portfolio".
Classification of Loan Portfolio Based on the Borrower's Payment Performance
Accrued interest and UF indexation readjustments from overdue loans are
only recognized when and to the extent effectively received. Overdue loans are
classified as such when the loan is 1-89 days overdue. Past due loans include,
with respect to any loan, the portion of principal or interest that is 90 or
more days overdue; the entire outstanding balance of any loan is included in
past due loans only after legal collection proceedings have been commenced. Once
a loan becomes more than 90 days overdue, a specific loan loss allowance is made
in an amount equal to 100% of the unsecured portion of the loan. Individual loan
loss allowances must be determined separately for the classified and
non-classified loan portfolios, but are required only to the extent that, in the
aggregate, they exceed the global allowance for each portfolio. See "--Allowance
for Loan Losses--Individual Allowances for Loan Losses".
The following table sets forth as of December 31 of each of the last five
years, the outstanding principal amount of loans that are current, overdue (1-89
days) and past due (90 or more days) as to payment of principal and interest.
58
At December 31,
----------------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(in millions of constant Ch$ of December 31, 2002, except for percentages)
Current(1)....................... 1,328,178 1,440,236 1,655,005 1,789,444 2,043,206
Overdue 1-29 days................ 12,477 10,107 7,967 3,575 3,818
Overdue 30-89 days............... 11,808 5,487 11,137 9,489 10,210
Overdue 90 days or more ("past
due")......................... 24,903 25,475 30,375 38,653 41,330
Total loans...................... 1,377,366 1,481,304 1,704,333 1,841,160 2,098,564
Overdue loans (1-89 days)
expressed as a percentage of
total loans 1.76 1.05 1.12 0.71 0.67
Past due loans as a percentage
of total loans 1.81 1.72 1.78 2.10 1.97
- ----------------------
(1) Includes Ch$9,346 in 1998, Ch$8,434 million in 1999, Ch$5,109million in
2000, Ch$9,941million in 2001, and Ch$ 5,160 million in 2002 of category C
and D loans.
The following table shows the principal balances included in current and
overdue (up to 90 days) categories in the table above of loans that have any
amount of principal or interest included in the category "past due" in such
table, in accordance with the rules of the Superintendency of Banks.
At December 31,
------------------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(in millions of constant Ch$ of December 31, 2002)
Mortgage loans................... 10,666 10,038 15,004 15,828 18,973
Commercial loans................. 20,999 20,277 16,368 16,170 23,907
Consumer loans................... 2,365 1,939 1,641 1,815 2,957
------ ------ ------ ------ ------
Total......................... 34,030 32,254 33,013 33,813 45,838
====== ====== ====== ====== ======
The following table sets forth, at December 31 of each of the last five
years, the amount of our past due loans per category of loan.
At December 31,
------------------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(in millions of constant Ch$ of December 31, 2002)
Mortgage loans.................... 2,074 3,245 4,061 3,837 4,271
Commercial loans.................. 22,019 20,587 24,826 34,008 36,432
Consumer loans.................... 571 572 459 420 440
Lease contracts................... 240 1,071 1,028 388 187
------ ------ ------ ------ ------
Total............................. 24,903 25,475 30,375 38,653 41,330
====== ====== ====== ====== ======
We suspend all accrual of interest and UF indexation readjustment of
principal on all loans classified in category C in excess of one year, all loans
classified in category D, all loans reclassified from category D to C and all
overdue loans, and on amounts not yet due for loans on which payments of
principal or interest are 90 days overdue. The amount of interest that would
have been recorded on such loans for the year ended December 31, 2002 had these
loans continued to accrue interest was approximately Ch$104 million.
The following table shows loans (included in the second table above) that
have been restructured. Restructured loans consist of loans which bear interest
at a rate two or more percentage points below our average rate for similar type
performing loans at the date of the restructuring.
59
At December 31,
-------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(in millions of constant Ch$ of December 31, 2002)
Ch$......................................... -- -- -- 315 330
UF 1,141 933 743 857 1,402
Foreign..................................... 511 332 127 31 0
Total loans................................. 1,652 1,265 870 1,203 1,732
The amount of interest that would have been recorded on these loans for the
year ended December 31, 2002 if these loans had been earning a market interest
rate was Ch$107 million.
Allowance for Loan Losses
Chilean banks are required to maintain allowances for loan losses in
amounts determined in accordance with regulations issued by the Superintendency
of Banks. A bank may also maintain voluntary allowances in excess of the minimum
required amount so as to provide additional coverage for potential loan losses.
Under these regulations, the minimum amount of required loan loss allowances is
the greater of (i) the bank's global loan loss allowances, and (ii) the
aggregate amount of its individual allowances for loan losses.
Global Allowance for Loan Losses
The amount of the global allowance for loan losses required to be
maintained by a bank is equal to the aggregate amount of its outstanding loans
multiplied by the greater of (i) the bank's "risk index" (as defined herein), or
(ii) 0.75%.
A bank's risk index is based on its classified loans, determined as
previously described. See "--Classification of Loan Portfolio". More
specifically, the index is computed as follows. First, the aggregate amount of
evaluated loans in each category from A through D is multiplied by the
corresponding required provision percentage. Such percentages are as follows:
Category Provision %
-------- -----------
A ................... 0
B ................... 1
B- .................. 20
C ................... 60
D ................... 90
The risk index itself is then computed by dividing (i) the aggregate amount
so computed by (ii) the aggregate amount (i.e., the outstanding principal
(whether or not past due) and accrued and unpaid interest) of all evaluated
loans. Also, in accordance with regulations established by the Superintendency
of Banks, the risk index calculated for the classified loans must also be
applied to the non-classified commercial loan portfolio. The chart below
illustrates the evolution of our consolidated risk index at December 31 of each
of the last five calendar years:
Consolidated
Year Risk Index %
---- ------------
1998 ....................... 1.66
1999 ....................... 2.11
2000 ....................... 2.03
2001 ....................... 1.83
2002 ....................... 1.67
Over a 5 year period, our consolidated risk index has increased from 1.66%
at December 31, 1998 to a peak of 2.11% at December 31, 1999 and then decreased
back to 1.67% at December 31, 2002. The variation in the
60
consolidated risk index is due principally to (a) an increase of loans
classified in category B- (for which 20% provisions are required) from 2.58% of
the evaluated loans in 1998 to 3.92% of the evaluated loans in 2001 and to 3.37%
of the evaluated loans in 2002, (b) an increase in loans classified in category
C (for which 60% provisions are required) from 1.19% of the evaluated loans in
1998 to 1.57% of the evaluated loans in 1999 and to 0.79% of the evaluated loans
in 2002; and (c) an increase in loans classified in category D (for which 90%
provisions are required) from 0.25% of the evaluated loans in 1998 to a peak of
0.57% of the evaluated loans in 2000 and to 0.37 % of the evaluated loans in
2002. Such evolution illustrates the fact that credit quality became polarized
during the crisis, with low quality credits deteriorating while good quality
loans remained good or even improved. In fact, the proportion of loans
classified in category A (for which no provisions are required) also increased
from 75.41% of the evaluated loans in 1998 to a peak of 77.54% of the evaluated
loans in 2000 and to 76.34% of the evaluated loans in 2002. In the fourth
quarter of 1998, soon after the BBVA Group took control of Banco BHIF, we
conducted an extensive revision of our loan portfolio, which resulted in the
downgrading of a part of our portfolio and a significant increase in the level
of provisions and in our risk level. Furthermore, the economic recession that
affected the country over the 1998-1999 period caused a significant loan quality
deterioration across the Chilean banking industry. The slow recovery that took
place in 2000 enabled us to slightly improve our portfolio quality over the year
but since the recovery has stalled over the year 2001 and the first half of
2002, our portfolio quality has remained stable and improved very slowly over
the year 2002. Since economic conditions have not yet recovered, we can not
foresee any significant improvement in our portfolio quality over the year 2003.
See "--Competition - Risk Index".
In 2002, we reviewed 93.77% of our loan portfolio. See "--Classification of
Loan Portfolio". We estimate that had we reviewed 100% of our loan portfolio,
the credit risk evaluation of all commercial loans (including commercial loans
having a principal amount outstanding smaller than Ch$30 million) would increase
the Consolidated Risk Index to approximately 1.77% at December 31, 2002. See
"--Analysis of our Loan Classifications".
Individual Allowances for Loan Losses
Banks in Chile are also required to establish individual allowances for
loan losses for loans that are more than 90 days past due in an amount equal to
100% of each overdue loan or the part thereof that is unsecured. This individual
loan loss allowance must be determined separately for the classified and
non-classified loan portfolios, but is required only to the extent it exceeds in
the aggregate the global allowance for loan losses for each portfolio. At
December 31, 2002, the aggregate amount of our potential individual allowances
for loan losses was 4.22% of our global allowance for loan losses.
Voluntary Allowance for Loan Losses
We have maintained a voluntary allowance for loan losses from time to time
in addition to the allowance for loan losses required by the regulations of the
Superintendency of Banks. Our policy in this regard has been to maintain a
voluntary allowance for loan losses that, together with the required allowance
for loan losses, aggregates approximately 100% of our past due loans. We have
adopted this policy in an effort to provide for any losses that could affect our
loan portfolio and that might arise from unforeseen circumstances beyond known
potential losses and losses inherent in a portfolio of a size and nature as
ours. At December 31, 2002, the aggregate amount of our allowances for loan
losses was 109% of our past due loans; with some voluntary allowance maintained
by us.
Analysis of Substandard Loans and Amounts Past Due
The following table analyzes our substandard loans (i.e., all of the loans
included in categories B-, C and D) and past due loans and the allowances for
loan losses existing at the dates indicated.
At December 31,
------------------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(in millions of constant Ch$ of December 31, 2002, except for percentages)
Total loans.......................... 1,377,366 1,481,304 1,704,333 1,841,160 2,098,564
Substandard loans.................... 51,233 74,262 87,151 89,434 88,937
61
At December 31,
------------------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(in millions of constant Ch$ of December 31, 2002, except for percentages)
Amounts past due(1).................. 24,903 25,475 30,375 38,653 41,330
To the extent secured(2).......... 12,117 19,083 17,741 17,714 31,834
To the extent unsecured........... 12,786 6,392 12,634 20,939 9,496
Allowance for loan losses......... 26,495 38,746 38,273 43,264 45,045
Substandard loans as a percentage
of total loans.................. 3.72 5.01 5.11 4.86 4.24
Amounts past due as a percentage
of total loans.................. 1.81 1.72 1.78 2.10 1.97
To the extent secured(2).......... 0.88 1.29 1.04 0.96 1.52
To the extent unsecured........... 0.93 0.43 0.74 1.14 0.45
Allowance for loan losses as a percentage of:
Total loans....................... 1.92 2.62 2.25 2.35 2.15
Total loans, excluding
contingent loans................ 1.97 2.73 2.33 2.44 2.24
Substandard loans................. 51.72 52.20 43.92 48.37 50.65
Total amounts past due............ 106.39 152.09 126.00 111.93 108.99
====== ====== ====== ====== ======
Total amounts past due unsecured.. 207.22 606.16 302.94 206.62 474.36
====== ====== ====== ====== ======
- ----------------------
(1) See "--Classification of Loan Portfolio Based on the Borrower's Payment
Performance" for the definition of past due loans.
(2) Collateral generally consists of a mortgage on real estate or a pledge of
marketable securities, equipment or inventory or a third party letter of
credit.
Analysis of Allowance for Loan Losses
The following table analyzes our allowance for loan losses, and changes in
the allowance attributable to charge-offs, new provisions, provisions released
and the effect of price-level restatement on the allowance for loan losses.
At December 31,
------------------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(in millions of constant Ch$ of December 31, 2002, except for percentages)
Allowance for loan losses at
beginning of period............. 15,155 26,495 38,746 38,273 43,264
Charge-offs........................ (17,393) (22,552) (23,759) (23,950) (28,274)
Provisions established............. 29,567 35,220 24,459 31,556 31,316
Price-level restatement(2)......... (835) (417) (1,173) (2,615) (1,261)
Allowance for loans acquired
from Banesto Chile Bank......... -- -- -- -- --
Allowance for loan losses at
end of the period............... 26,495 38,746 38,273 43,264 45,045
Ratio of charge-offs to average
loans(1)........................ 1.31% 1.61% 1.59% 1.38% 1.49%
Allowance for loan losses at
end of period as a
percentage of total loans....... 1.92% 2.62% 2.25% 2.35% 2.15%
- ----------------------
(1) Represents the aggregate amount of the allowance for loan losses released
during each year or period as a result of charge-offs, recoveries or a
determination by management that the level of risk existing in the loan
portfolio had been reduced.
(2) Reflects the effect of inflation on the allowances for loan losses at the
beginning of each year, adjusted to constant Chilean pesos of December 31,
2002.
62
Our policy with respect to charge-offs follows, and in the case of
installment loans, is stricter than, the regulations established by the
Superintendency of Banks. Under these regulations, (i) an unsecured loan (or
part thereof) must be charged off not more than 24 months after being classified
as past due and secured loans must be charged off within 36 months after being
classified as past due, (ii) a loan must be charged off when we do not have any
right to commence an action for collection in the courts, and (iii) in the case
of loans payable in installments, the aggregate amount of the loan must be
charged off when one installment is past due six months.
Based on information available to us regarding our debtors, we believe that
our aggregate allowance for loan losses is sufficient to cover known potential
losses and losses inherent in a loan portfolio of a size and nature as ours.
Allocation of Allowance for Loan Losses
The following tables set forth, at December 31 of each of the last five
calendar years, the proportions in which our required minimum allowance was
attributable to commercial, consumer and residential mortgage loans, and the
amount of allowance which is allocated to any particular category at each such
date.
At December 31,
---------------------------------------------------------------------------
1998
---------------------------------------------------------------------------
(in millions of constant Ch$ of December 31, 2002, except for percentages)
Allowance
amount as a Allowance Loans in a
percentage of amount as a category as a
Allowance loans in percentage of percentage of
amount category total loans total loans
--------- ------------- ------------- -------------
Commercial loans..................... 19,868 1.91% 1.44% 75.57%
Consumer loans....................... 4,621 4.77 0.34 7.03
Residential mortgage loans........... 1,780 0.74 0.13 17.40
Total allocated allowance............ 26,269 1.90 1.91 100.00
Voluntary allowance.................. 226 -- 0.02 --
------ ---- ---- ------
Total allowance...................... 26,495 1.92% 1.92% 100.00%
====== ==== ==== ======
At December 31,
--------------------------------------------------------------------------------------------------------
1999 2000
----------------------------------------------------- --------------------------------------------------
(in millions of constant Ch$ of December 31, 2002, except for percentages)
Allowance Allowance Loans in a Allowance Allowance Loans in a
amount as a amount as a category as amount as a amount as a category as
percentage percentage a percentage percentage percentage a percentage
Allowance of loans in of total of total Allowance of loans in of total of total
amount category loans loans amount category loans loans
------ -------- ----- ----- ------ -------- ----- -----
Commercial loans.......... 25,420 2.44% 1.71% 70.33% 30.591 2.62% 1.79% 68.48%
Consumer loans............ 5,152 4.00 0.35 8.69 4.920 3.17 0.29 9.12
Residential mortgage
loans.................. 2,455 0.79 0.17 20.98 2.762 0.72 0.16 22.40
Total allocated
allowance.............. 33,027 2.23 2.23 100.00% 38.273 2.24% 2.24 100.00%
------ ---- ---- ------
------ ---- ---- ------ -- --
Voluntary allowance....... 5,719 -- 0.39 --
------ ---- ---- ------
Total allowance........... 38,746 2.62% 2.62% 38.273
====== ==== ==== ======
63
At December 31,
--------------------------------------------------------------------------------------------------------
2001 2002
----------------------------------------------------- --------------------------------------------------
Allowance Allowance Loans in a Allowance Allowance Loans in a
amount as a amount as a category as amount as a amount as a category as
percentage percentage a percentage percentage percentage a percentage
Allowance of loans in of total of total Allowance of loans in of total of total
amount category loans loans amount category loans loans
------ -------- ----- ----- ------ -------- ----- -----
(in millions of constant Ch$ of December 31, 2002, except for percentages)
Commercial loans............ 30,298 2.50% 1.72% 69.04% 29,063 2.04% 1.40% 68.55%
Consumer loans.............. 5,929 3.36 0.32 9.60 10,035 5.28% 0.52% 9.78%
Residential
mortgage loans........... 3,356 0.85 0.18 21.35 3,034 0.72% 0.16% 21.67%
------ ---- ---- ------ ------ ---- ---- ------
Total allocated allowance... 39,583 2.15 2.15 100.00 42,132 2.07% 2.07% 100.00%
Voluntary allowance......... 3,681 -- 0.20 -- 2,913 0.14%
------ ---- ---- ------ ---- ---- ------
Total allowance............. 43,264 -- -- 45,045
====== ======
The allowance for commercial loans includes Ch$1,416 million due to country
risk.
As of December 31, 2002, we had no loans subject to the 5% additional
allowance requirement for certain commercial loans, and therefore made no
allowances to comply with the additional allowance requirement for restructured
consumer loans.
We do not collect comprehensive data regarding the allocation of
charge-offs or the allowance for loan losses among the various types of economic
activity set forth in the table under "Loans by Economic Activity". During the
years 1999, 2000, 2001 and 2002 all of our ten largest (per year) loan
charge-offs related to our commercial loans. Such loans were outstanding to
borrowers engaged in a wide variety of activities, and our management is not
otherwise aware of any concentration of loan charge-offs or allowance for loan
losses in any particular area of economic activity.
Composition of Deposits and Other Commitments
The following table sets forth the average balances of our deposits and
other commitments for the years 2000, 2001 and 2002.
For the years,
-----------------------------------------------------------------------------------
2000 2001 2002
------------------------- ------------------------- ------------------------
Average Average Average Average Average Average
Balance nominal rate balance nominal rate Balance nominal rate
------- ------------ ------- ------------ ------- ------------
(in millions of constant Ch$ of December 31, 2002, except for percentages)
Checking accounts................ 163,709 -- 179,067 -- 192,398 --
Other demand liabilities......... 174,869 -- 198,980 -- 226,941 --
Savings accounts................. 54,310 8.1 57,379 5.4 57,438 3.8
Time deposits.................... 763,860 9.4 943,699 6.6 1,153,750 4.8
Other commitments 0 -- 0 -- 0 --
--------- --------- ---------
Total 1,156,748 1,379,125 1,630,527
========= ========= =========
64
C. Organizational Structure
See "History and Development of the Company".
Below is a simplified organizational chart of our significant subsidiaries
as of March 2003.
Total Assets
BBVA Chile (in millions of
BBVA Chile. Ownership Ch$ of December
Subsidiary Country Activity Voting Power (%) 30, 2002)
---------- ------- -------- ------------ ---------- ---------------
Stock
BBVA BHIF Brokerage Chile Brokerage 100.00 100.00 108,958.0
Financial
BHIF Advisory Chile Advisory 98.60 98.60 1,124.2
Closed-end
BHIF Closed-end Fund Manager Chile Fund Manager 100.00 100.00 1,480.2
Residential
Housing
BHIF Residential Housing Fund Fund
Management Chile Management 100.00 100.00 315.1
Residential
BBVA BHIF Residential Leasing Chile Leasing 97.48 97.48 6,620.4
Mutual
Fund
BBVA BHIF Mutual Fund Chile Management 100.00 100.00 5,880.8
Insurance
BBVA BHIF Insurance Brokerage Chile Brokerage 100.00 100.00 3,177.1
D. Property, Plants and Equipment
Description Of Property
We are domiciled in Chile and own our principal executive offices at
Huerfanos 1234, Santiago, Chile. At December 31, 2002, we owned the properties
where 45 of our 80 branches are located, and the remaining 35 branch locations
were leased. All of these facilities are adequate for our present needs and
suitable for their intended purposes. Our branches are located in 12 of Chile's
thirteen regions. We maintained the number of branches at 80 during 2002 and
plan to continue increasing the number of full-service branches as the economic
conditions recover. We also plan to extend our network of automated and
home-banking facilities.
Item 5. Operating and Financial Review and Prospects
A. Operating Results
Introduction
The following discussion should be read in conjunction with our
Consolidated Financial Statements, including the Notes thereto. Certain amounts
(including percentage amounts) that appear herein have been rounded. Certain
tabular information and percentage amounts may not add due to rounding.
Our Consolidated Financial Statements included elsewhere in this Annual
Report have been prepared in accordance with Chilean GAAP (including the rules
of the Superintendency of Banks relating thereto), which differ in certain
significant respects from US GAAP. Note 28 to the Consolidated Financial
Statements describes the principal differences between Chilean GAAP and US GAAP
as they relate to us and includes a reconciliation to US GAAP of our net income
and shareholders' equity for and at the end of the covered periods.
Unless otherwise indicated, the financial data presented herein for all
full-year periods is restated in constant Chilean pesos of December 31, 2002.
See Note 1.c) to the Consolidated Financial Statements.
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Critical accounting policies
As a Chilean bank, we prepare our consolidated financial statements in
conformity with accounting principles generally accepted in Chile and the rules
of the Superintendency of Banks relating thereto, which, together, differ in
certain significant aspects from US GAAP. See Note 28 to our audited
consolidated financial statements contained at the end of this Annual Report for
a description of the principal differences between Chilean GAAP and US GAAP as
they relate to us.
Notes 1 and 2 to our audited consolidated financial statements contain a
summary of our significant accounting policies. Some of these policies demand
management to make difficult, complex or subjective judgements. As dictated by
our accounting procedures, these judgements are then submitted to our Audit
Committee and/or to our regulatory authorities and are always disclosed in the
notes to our financial statements.
Management's ability to make subjective decisions is more restricted by
Chilean GAAP than by US GAAP. For example, Chilean GAAP requires the level of
the allowances for loan losses to be determined on the basis of specific rules
rather than on the subjective judgement involved under the US GAAP impairment
process. Management can add voluntary allowances, which have a different
accounting treatment, but can not modify the allowances so determined.
We believe that of our critical accounting policies, the following may
involve higher degrees of judgement and complexity:
o Investments. Investments which have a secondary market are carried at
market value, except for investments held by the brokerage and other
subsidiaries which are carried at the lower of cost or market value.
Instructions issued by the Superintendency of Banks require market value
adjustments to be made against income, except in the case of securities
available for sale, in which case the adjustments are made directly against
the equity account "Market value adjustments of available for sale
securities", included in Reserves. All other investments are carried at
cost plus accrued interest and UF indexation adjustment, as applicable.
We enter into repurchase agreements as a form of borrowing. In this regard,
our investments which are sold subject to a repurchase obligation and which
serve as collateral for the borrowing are reclassified as "Investment
collateral under agreements to repurchase". The liability to repurchase the
investments is classified as "Securities sold under agreements to
repurchase".
We also enter into resale agreements as a form of investment. Under these
agreements, we purchase securities which are included as an asset under the
caption "Investments purchased under agreements to resell".
o Derivatives. The Bank engages in derivative transactions for its own
account and on behalf of its customers, mainly corporate clients of the
import sector. These transactions arise from forward exchange contracts
which are of two types: (i) transactions covering two foreign currencies
and (ii) transactions covering Chilean pesos against the U.S. dollar.
Foreign exchange contracts involve an agreement to exchange the currency of
one country for the currency of another country or an agreed-upon price and
settlement date. These contracts are generally standardized contracts,
normally for periods between 30 and 90 days and are not traded in a
secondary market, however, in the normal course of business and with the
agreement of the original counterparty, they may be terminated or assigned
to another counterparty. When the Bank enters into a forward exchange
contract, it analyzes and approves the creditor's risk (the risk that the
counterparty might default on is obligation). Subsequently, on an ongoing
basis, it monitors the possible losses involved in each contract. To manage
the level of credit risk the Bank deals with counterparties of good credit
standing, enters into master netting agreements whenever possible and when
appropriate, obtains collateral.
The Central Bank requires that foreign exchange forward contracts be made
only in US dollars and other major foreign currencies. In the case of the
Bank, most forward contracts are made in US dollars against the Chilean
peso or the UF. From time to time, forward contracts are also made in other
currencies, but only when the Bank acts as an intermediary.
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The Bank's counterparties in derivative transaction are mainly
international investment bank and domestic corporate and financial
institution clients.
Under Chilean GAAP, forward contracts between foreign currencies and U.S.
dollars are reported at fair value with realized and unrealized gains and
losses on these instruments recognized in other income. Forward contracts
between the U.S. dollar and the Chilean peso are valued at the closing spot
exchange rate of each balance sheet date with the initial discount or
premium being amortized over the life of the contract in accordance with
Chilean hedge accounting criteria.
Under Chilean GAAP interest rate swap agreements that hedge part of the
Bank's investment portfolio are recorded on balance sheet at their
estimated fair market values. Unrealized gains or losses are credited or
charged to income for those agreements that are designated by the Bank's
management as hedges of part of the investment portfolio classified as
trading. In the case of the interest rate swap agreements designated by the
Bank's management as hedges of part of the investment portfolio as
permanent investments, unrealized gains and losses are credited or charged
to shareholders' equity.
o Allowance for loan losses. The allowance for loan losses is established
through a charge to the provision for loan losses. We have established
allowances to cover possible loan losses in accordance with regulations
issued by the Superintendency of Banks. The allowance for loan losses is a
significant estimate and is regularly evaluated by us for adequacy by
taking into consideration factors such as changes in the nature and volume
of the loan portfolio, trends in actual and forecasted portfolio credit
quality and current economic conditions that may affect the borrower's
ability to pay. See "Selected Statistical Information-- Risks of the Loan
Portfolio". This allowance is always estimated according to specific rules
set by the Superintendency, who rates banks according, among other factors,
by the way they conduct this process.
o Transfers of Financial Assets. We are engaged in securitization activities
in connection with some of our businesses. Gains and losses from
securitization are recognized in our consolidated financial statements of
income when we relinquish control of the transferred financial assets. The
gain or loss on the sale of financial assets depends in part on the
previous carrying amount of the assets involved in the transfer. The
securitization gain or loss is partly dependant on our best estimates of
key assumptions, including forecasted credit losses, payment rates, forward
yield curves and appropriate discount rates. The use of different estimates
or assumptions could produce different financial results.
Overview
As described below, our financial performance is substantially influenced
by factors such as changes in interest rates and inflation rates and economic
conditions prevailing in Chile, and by our policy with respect to charging off
loans and our recoveries on such loans.
Chilean Economy
All of our operations and substantially all of our customers are located in
Chile. Accordingly, our results of operations and financial condition are
substantially dependent upon economic conditions prevailing in Chile. The
Chilean economy has experienced continued growth during the last decade as
evidenced by a 5.5% annual compound average increase in GDP from 1992 to 2002,
which has resulted in increased demand for loans and credit facilities,
particularly from middle-market businesses and individuals. In addition, the
inflation rate has been declining from 15% in 1992 to 2.6% in 2001, and to 2.8%
in 2002, even though the rise in the international price of oil pushed the
inflation rate upwards. The slow growth in Chilean gross domestic product has
also led to less significant wage growth in real terms, which has led to smaller
increases in both the number and aggregate amount of savings and demand
deposits.
In 1998, as an effect of the Asian crisis, there was a sharp slowdown in
the Chilean economy, as well as a steep decline in both copper prices and in
Chilean exports generally. In 1999, Chile's GDP decreased 0.8% in real terms.
This situation improved during 2000, when Chile's GDP increased 4.2% in real
terms. The reduction in the price of Chile's commodity exports and the continued
gap between aggregate expenditures and gross domestic product have
67
decreased Chile's current account deficit to almost 0.1% of GDP in 1999. In 2000
this situation changed and the Chile's current account deficit was 1.4% of GDP.
At the same time, the financial turmoil in other emerging markets has placed
pressure on the Chilean peso. In order to support the Chilean peso and to reduce
the current account deficit, the Central Bank increased the overnight interbank
rate to 8.5% in February 1998 and to 14.0% in September 1998. Monetary policy
has been relaxed since then. The level of the Central Bank's overnight interbank
rate as of December 31, 2002 was 3.0%, and continued decreasing during the first
half of 2003.
Within this context, the Central Bank changed its reference interest rate
from a real interest rate definition to a nominal definition. Thus, on July 26,
2001, this rate was changed from a 3.5% real interest rate to a 6.5% nominal
interest rate, assuming a 3% inflation for the year. From then on, the reference
rate has been expressed in nominal terms.
The reduced level of inflation (by local standards) is explained by a low
level of consumer expenditures as well as by the decreasing dollar prices of
imported consumer goods. This moderate inflationary trend allowed the Central
Bank to reduce the reference interest rate eight times during the year 2002,
bringing it from 6.5% in January to 3.0% at the end of the year. The downward
trend was immediately followed (and at times anticipated) by the interest rate
on long term instruments from the Central Bank.
Notwithstanding the actions taken by the Central Bank, there exists a
potential for a reduction in economic activity in Chile. Any such decline may
have a material adverse effect on our business, financial condition or results
of operations, including a decline in our net interest margin, a reduced rate of
growth in our loan portfolio, increased loan charge-offs, higher provisions for
loan losses and lower fee and trading income. In particular, we expect such
developments would reduce our net interest margin and result in higher loan loss
provisions and charge-offs and, although our management does not anticipate that
economic activity will materially decline or that we will be materially
adversely affected as a result of the current economic situation, there can be
no assurance that such a material adverse effect on us will not occur or that
the current economic situation in Chile will not materially worsen.
Inflation
Chile has experienced high levels of inflation in the past, which have
significantly affected our financial condition and results of operations.
However, the rate of inflation in Chile has had a downward trend for the last
seven years and was 4.7% in 1998, 2.3% in 1999, 4.5% in 2000, 2.6% in 2001 and
2.8% in 2002.
In accordance with Chilean GAAP, we reflect the effect of inflation on its
financial statements considering whether an asset or liability is of a monetary
nature or not. These adjustments measure the monetary gain or loss in purchasing
power from holding monetary assets and liabilities exposed to the effects of
inflation, other than those denominated in UF or foreign currencies.
Substantially all of our assets and liabilities are monetary. Substantially
all monetary assets and liabilities in Chile are denominated in (i) UF, a unit
of account developed during the 1960s whose value in Chilean pesos is indexed to
Chilean inflation, (ii) nominal Chilean pesos or (iii) dollars. The UF is
revalued once a month for each day in the period beginning on the tenth day of
such month through the ninth day of the succeeding month in order to reflect the
prior month's change in the CPI as determined by the INE. At December 31, 2002,
one UF was equal to Ch$16,744.12 (US$23.5 at the Observed Exchange Rate in
effect at such date). A significant portion of the loans made by us with a
maturity greater than 90 days is denominated in UF, as are savings deposits and
certain time deposits (generally those having maturities in excess of 90 days).
The nominal Chilean peso value of UF-denominated loans and deposits will
increase or decrease with changes in the CPI. The effect of any changes in the
nominal Chilean peso value of the UF on UF-denominated assets or liabilities is
reflected in our statement of income as an increase or decrease in interest
revenue or expense.
Our earnings will be positively affected by inflation to the extent that
our average UF-denominated assets exceed our average UF-denominated liabilities.
This positive effect will decrease as the rate of inflation decreases. See
"--Net Interest Revenue--Interest Revenue". Our earnings will be negatively
affected by inflation in any period in which our average UF-denominated
liabilities exceed our average UF-denominated assets. Net interest revenue
68
on Chilean peso-denominated consumer loans is more negatively affected by
decreasing inflation than net interest revenue on UF-denominated commercial
loans because consumer loans are unindexed short-term loans and the nominal
interest rates earned on consumer loans decrease with decreasing inflation.
Commercial loans are typically longer term loans and are denominated in UF. In
addition, we have Chilean peso-denominated, non-interest earning assets and
non-interest bearing liabilities whose value is particularly susceptible to
inflation, which causes them to decrease in real terms. Our earnings will be
positively affected by inflation in any period in which our Chilean
peso-denominated, non-interest bearing liabilities are greater than our Chilean
peso-denominated, non-interest earning assets and negatively affected by
inflation in any period in which our Chilean peso-denominated, non-interest
earning assets are greater than our Chilean peso-denominated, non-interest
bearing liabilities. Chilean GAAP requires that adjustments be made to
non-monetary assets and liabilities, primarily to our fixed assets and to our
shareholders' equity, to reflect the effects of inflation. The net effect of
this inflation adjustment is shown as "price-level restatement" in our income
statement. The inflation rate used for purposes of such adjustments is the
change in the CPI, with a lag of one month, which was 2.6%, 4.7%, 3.1% and 3.0%
in the years ended December 31, 1999, 2000, 2001 and 2002 respectively.
Interest Rates
In Chile, the current account was adversely affected by the Asian crisis,
which resulted in lower volumes of exports to the affected countries, as well as
lower prices of commodities, such as copper, wood pulp, fish meal and fruits,
exported by Chile. See "--Chilean Economy". Apart from the effects of the Asian
crisis on the current account deficit, Chile's economy in the second half of
1997 and the first quarter of 1998 was showing signs of overheating since
aggregate demand (consumption plus investment) was expanding at a faster rate
than GDP. This gap, together with the current account deficit, prompted the
Central Bank to adopt a very tight monetary policy. The Central Bank increased
the overnight interbank rate to 8.5% in early January and to 14.5% in
mid-September of 1998. As a result of these policies, economic growth
decelerated sharply in 1998. During this period, GDP grew 3.9% and the current
account reached 5.7% of GDP. The growth rate of aggregate demand also slowed to
3.9% in 1998 compared to 9.1% in 1997.
As a result of the sharp deceleration of GDP and aggregate demand in the
last quarter of 1998, the Central Bank began to relax its monetary policy and
continued to do so during the second half of 2000. The Central Bank's overnight
interbank rate was 5.0% as of December 31, 2000. Despite these lower rates, GDP
growth did not recover until the second quarter of 2000. GDP grew 2.8% in 2001,
below expectations, inflation rose 2.6% during the same period and domestic
spending estimated growth was approximately 2.8%. A decreasing interest rate
since early 2000 and the higher expected growth in GDP are expected to
positively affect the growth and quality of our investment portfolio.
After the contractionary monetary policy adopted to deal with the Asian
crisis, in 1999 the Central Bank reassumed a normal monetary stance. As of
December 31, 2002, with overnight interest rates at 3.0% nominal, the Central
Bank has more freedom to confront higher international interest rates:
o On the inflationary side, the Central Bank has announced that in the
0-12 months horizon, the relevant inflationary target is core
inflation. From 12-24 months it is the total CPI inflation that guides
monetary policy. In that context, there are no relevant threats to
achieve inflation targets.
o The exchange rate was changed from a band to a float system. This
gives the Central Bank the ability to allow wider variations in the
exchange rate without being forced to act, thus discouraging
speculation on the appreciation or depreciation of the Chilean peso.
o Until August 9, 2001, the Central Bank expressed its reference
interest rate in real terms. Effective that date, the Central Bank
begun expressing it in nominal terms, assuming an annual inflation of
3.5% for 2001. The rate changed from 3.0% in real terms to 6.5% in
nominal terms, without further changes until year end. In 2002, the
Central Bank has reduced the rate on eight occasions, ending the year
with a reference rate of 3.0%. In 2003, the Central Bank further
reduced its reference interest rate on one occasion, to 2.75%, where
it stood as of May 31, 2003.
69
Interest rates earned and paid on our assets and liabilities reflect to a
certain degree inflation and expectations regarding inflation as well as shifts
in short-term rates related to the Central Bank's monetary policies. The Central
Bank manages short-term interest rates based on its objectives of balancing low
inflation and economic growth. Because our liabilities generally reprise faster
than its assets, changes in the rate of inflation or short-term rates in the
economy are reflected in the rates of interest paid by us on our liabilities
before such changes are reflected in the rates of interest earned by us on our
assets. Accordingly, our net interest margin on assets and liabilities tends to
be adversely affected in the short term by increases in inflation or short-term
rates and to benefit in the short term from decreases in inflation or short-term
rates, although the existence of non-interest bearing Chilean peso-denominated
demand deposits tends to mitigate both effects. See "--Inflation". In addition,
because our Chilean peso-denominated liabilities have relatively short repricing
periods, they are generally more responsive to changes in inflation or
short-term rates than our UF-denominated liabilities. As a result, during
periods when current inflation or expected inflation exceeds the previous
month's inflation, customers often switch funds from UF-denominated deposits to
more expensive Chilean peso-denominated deposits, thereby adversely affecting
our net interest margin.
Business strategy
The growth of the economy has generated a demand for financial services
from an increasing number of individuals in all income segments of the
population and from an increasing number of companies, although at a slow pace
due to the current economic environment. Our business strategy has shifted to
target the growing demand for banking products and services from upper to
lower-middle income individuals and from large corporations to small-size
companies. Our strategy aims to increase lending and to provide services through
cross-selling to all customer segments. Our historical strength in residential
mortgages and with medium and small-size companies serves as a natural and
strong base for expansion in those markets. While we believe that this strategy
has the potential to provide higher net interest margins, it also has the
potential to expose us to a higher degree of credit risk. We continuously seek
to improve the quality of our loan portfolio and our risk index through the
adherence to our new loan origination procedures and credit management policies.
See "Information on the Company -- Business Overview" and "Selected Statistical
Information-- Loans by economic activity".
Mortgage Finance Bonds Issued and Held by Us
From time to time, we use other sources of financing to fund our
residential mortgage loans; however, we generally fund our residential mortgage
loans through the issuance of mortgage finance bonds which are our recourse
obligations with payment terms matched to the related mortgage loans, bearing
interest at a spread below the interest rate applicable to such mortgage loans.
However, if we were ever to be liquidated, the mortgage finance bond holders
would be secured by a pool of mortgages.
Mortgage finance bonds are traditionally placed with institutions, such as
pension funds, mutual funds and insurance companies, seeking long-term
fixed-income investments. However, we also purchase mortgage finance bonds we
have issued for our own account and hold them as financial investments. Unlike
US GAAP, under which mortgage finance bonds issued by us and held for future
sale would be offset against the related liability, under Chilean GAAP such
mortgage finance bonds and the related liability appeared on our balance sheet
until 2001 as "financial investment" and "mortgage finance bonds", respectively.
Since 2002, under Chilean GAAP mortgage finance bonds issued by us and held for
future sale have been offset by the related liability, as in US GAAP. See Note
2. to the Consolidated Financial Statements. At December 31, 2002, we had issued
and outstanding Ch$257,134.5 million of mortgage finance bonds, net.
According to the General Banking Law, if a bank faces solvency problems and
a reorganization plan has been proposed, its board of directors shall put up at
separate auctions its residential mortgage loans and its commercial real estate
loans funded through mortgage finance bonds. The board will transfer the loans
to the best offer as long as such offer is equal to or higher than the amount
that shall be paid to the other creditors of the bank pursuant to the
reorganization plan. If that is not the case, a new auction shall be carried out
and the same rules shall apply. If there is a successful bidder, it shall pay
the mortgage finance bonds, but the aggregate principal amount of such bonds
shall be reduced to the amount paid by the successful bidder. If the auction
does not succeed, the holders of the mortgage finance bonds shall be subject to
the provisions of the reorganization plan. In the event of mandatory
70
liquidation of a bank, the same rules apply; provided that in order for an offer
to be accepted, it shall be equal to or higher than 90% of the face value of the
mortgage finance bonds, unless the holders of a majority of the issued and
outstanding mortgage finance bonds approve the offer in a meeting specially
called for this purpose by the liquidator.
Pursuant to the regulations of the Superintendency of Banks, as of April 1,
1996, mortgage finance bonds issued by us and held in our own investment
portfolio, which had previously been carried at cost, were required to be marked
to market on an ongoing basis (mortgage finance bonds issued by other banks and
held by us in our investment portfolio were already, as of April 1, 1996,
required to be marked to market). The gains and losses resulting from the
holding of mortgage finance bonds issued by us (or issued by other banks) appear
as "other operating income (gains and losses from trading and brokerage
activities)" in our consolidated statements of income.
However, in September 1998, the Superintendency of Banks modified the
regulations regarding the valuation of financial investments. Due to this
modification, all mortgage finance bonds issued by us and held in our own
investment portfolio that were acquired prior to January 1, 1998 are recorded at
their December 31, 1997 carrying values until they reach maturity or are sold.
See "Description of Business--Chilean Regulation and Supervision--Recently
Enacted Banking Legislation--Mark to Market Requirements for Financial
Investments".
Contingent Loans
Contingent loans consist of unfunded letters of credit, guarantees,
performance bonds and other unfunded commitments. Chilean banks charge their
customers a fee on contingent loans as well as interest for the periods of the
contingent debt. Accordingly, contingent loans are treated by us as interest
earning assets. As a result of this treatment, the comparatively low rates of
interest earned on these assets have a distorting effect on the average interest
rate earned on total interest earning assets. See "Description of
Business--Selected Statistical Information--Average Balance Sheets and Interest
Rate Data".
In addition, under Chilean GAAP, rights and obligations with respect to
contingent loans are treated as contingent assets and liabilities on our
consolidated balance sheets. This practice differs from US GAAP, under which
such contingent amounts are not recognized on the consolidated balance sheets
but are disclosed off-balance sheet in memorandum accounts. Accordingly, to the
extent we maintain contingent loans and contingent liabilities, our consolidated
balance sheets will appear different than if they had been prepared under US
GAAP. See Note 28.f) to the Consolidated Financial Statements.
At December 31, 2002, we had Ch$84,691.5 million contingent loans and
Ch$85,457.4 million contingent liabilities outstanding.
Accounting Treatment for Financial Investments
In 1998, we opted to apply a new rule of the Superintendency of Banks,
which changed the accounting treatment for financial investments considered
available for sale. This criteria allows us to charge to an equity account, and
not income, the market value adjustments of such investments. The effect of this
change resulted in a charge to equity of Ch$1,729 million in 1998. As from June
1998, and with the consent of the Superintendency of Banks, we began to record
commissions earned and paid relating to retail banking products on an accrual
basis. Until then, these commissions were recorded at the time of collection or
payment.
Deferred income taxes
As of January 1, 1999, we and our subsidiaries have recorded the effects of
deferred income taxes for temporary differences in accordance with Circular 2984
of the Chilean Superintendency of Banks and Financial Institutions and Technical
Bulletin No. 60 of the Chilean Institute of Accountants. This generated a credit
of Ch$5,389 million to income for the year.
As of January 1, 2002, the effects of deferred income taxes for temporary
differences generated a credit of Ch$3,743 million to income for the year. See
Note 23 to the Consolidated Financial Statements.
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Net Income (2002)
Consolidated net income for the year ended December 31, 2002 increased to
Ch$20,255 million in 2002 from Ch$15,335 million in 2001 due principally to a
Ch$15,672 million increase in net interest revenue, to a Ch$4,534 million
increase in income from services, net and to a Ch$2,196 million increase in the
recoveries of loans previously charged off; partially offset by a Ch$12,586
million decrease in other operating income, a Ch$3,864 million increase in
operating expenses and a Ch$1,638 million increase in income taxes. All other
items on the income statement had variations of under Ch$500 million from 2001.
Charge-offs and Recoveries
At December 31, 2002, we had Ch$115,312 million in memorandum accounts
related to loans previously charged off, comprised of Ch$53,818 million of loans
reacquired from the Central Bank in connection with the Central Bank
Subordinated Debt (the "Reacquired Loans Previously Charged Off") and Ch$61,327
million of loans charged off by us as part of our operating policies (the
"Operational Loans Previously Charged Off"). See "Business Overview--Chilean
Regulation and Supervision--The Central Bank", "--Other Income--Recoveries of
Loans Previously Charged Off" and "Selected Statistical Information--Analysis of
our Loan Classifications". The following table provides information regarding
our loans previously charged off at the end of each of the last five years.
At December 31,
------------------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(in millions of constant Ch$ of December 31, 2002)
Reacquired Loans Previously
Charged Off..................... 51,009 49,935 43,330 47,537 49,388
Operational Loans Previously
Charged Off..................... 114,062 115,417 80,362 67,607 65,924
------- ------- ------- ------- -------
Total........................... 165,071 165,352 123,692 115,144 115,312
======= ======= ======= ======= =======
Results of Operations for the Years Ended December 31, 2000, 2001 and 2002
The following table sets forth the principal components of our net income
for the years ended December 31, 2000, 2001 and 2002.
Year ended December 31, % Change
--------------------------------------- ---------------------------
2000 2001 2002 2000/2001 2002/2001
---- ---- ---- --------- ---------
(in millions of constant Ch$ of December 31, 2002, except percentages)
Principal components of net income:
Net interest revenue................... 80,079 93,342 109,014 16.60% 16.8%
Provision for loan losses.............. (24,459) (31,556) (31,316) 29.00 (0.8)
Income from services, net.............. 11,795 17,228 21,762 46.10 26.3
Other operating income, net............ 5,328 4,392 (8,195) (17.60) (286.6)
Other income and expenses, net:
Recovery of loans previously charged
off.................................... 7,674 7,500 9,696 (2.30) 29.3
Other income and expenses.............. (15) 1,093 1,169 (7,671.40) 7.0
Operating expenses..................... (62,074) (71,295) (75,159) 14.90 5.4
Loss from price-level restatement...... (5,388) (4,464) (4,164) (17.10) (6.7)
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Year ended December 31, % Change
----------------------------------------- --------------------------
2000 2001 2002 2000/2001 2002/2001
---- ---- ---- --------- ---------
(in millions of constant Ch$ of December 31, 2002, except percentages)
Minority interest in consolidated
subsidiaries......................... (20) (24) (34) 21.10 41.7
Income taxes........................... 1,984 (881) (2,518) (144.40) 185.8
----- ---- ------ ------- -----
Net income............................. 14,904 15,335 20,255 2.90% 32.1%
===== ==== ====== ======= =====
Our net income for 2002 reached Ch$20,255 million, an increase of 32.1%
from Ch$15,334 million in 2001, which in turn had increased by 2.9% from
Ch$14,905 million in 2000. The increase in 2002 was attributable principally to
(i) a 16.8% increase in net interest revenue due to an increase in volume of
interest bearing assets and liabilities, (ii) a 26.3% increase in income from
services, net, due mainly to a 41.2% increase in commissions on pension
payments, and to a 30.4% reduction in the commissions paid on placement and
servicing of loans, and (iii) to a 29.3% increase in the recovery of loans
previously charged off.
Return on total average assets for each of 2000, 2001 and 2002 was 0.68%,
0.59% and 0.71%, respectively. Return on average shareholders' equity was 8.21%
for 2002 compared to 6.28% for 2001 and 7.63% for 2000. The increase in return
on total average assets in 2002 is attributable mostly to the improvements in
portfolio quality and to the increase in recoveries of loans previously charged
off. Net interest revenue has continued to grow slower than loans due to the
prevailing low levels of both interest rates and inflation, dampening the growth
of our return on average shareholders' equity. The decreasing level of
provisions is mostly due to an industry wide trend, caused by the stable
economic conditions prevailing during most of the year 2002 in Chile.
Net Interest Revenue
Our net interest revenue increased by 16.8% in 2002 compared to 2001. This
increase comes on top of the 16.6% increase registered in 2001 and is completely
attributable to the increase in the average volume of interest earning assets,
which more than compensated for the reduction caused by the declining levels of
the reference interest rate.
The following table sets forth the elements of our net interest revenue for
the years ended December 31, 2000, 2001 and 2002:
Year ended December 31, % Change
----------------------------------------- --------------------------
(in millions of constant Ch$ of December 31, 2002)
2000 2001 2002 2001/2000 2002/2001
---- ---- ---- --------- ---------
Interest revenue.............. 225,990 218,194 216,464 (3.4)% (0.8)%
Interest expense.............. (145,911) (124,852) (107,450) (14.4)% (13.9)%
-------- -------- -------- ----- -----
Net interest revenue....... 80,079 93,342 109,014 16.6% 16.8%
======== ======== ======== ===== =====
The following table sets forth the effect on our net interest revenue of
changes in (i) the average volume of interest earning assets and interest
bearing liabilities, and (ii) their respective average nominal interest rates
during the relevant periods:
73
2001/2000 2002/2001
Increase (decrease) Increase (decrease)
------------------- -------------------
(in millions of constant Ch$ of December 31, 2002)
Due to changes in average volume of interest earning assets
and interest bearing liabilities............................ 15,115 24,635
Due to changes in average nominal interest rates............... (1,859) (8,958)
------ ------
Net change..................................................... 13,256 15,677
====== ======
Net interest revenue in 2002 increased 16.8% from 2001, a Ch$15,676 million
increase. Such increase is a net result of a 10.5% increase in the volume of
interest earning assets and of a 13.2% increase in the volume of interest
bearing liabilities. The lower increase in interest bearing liabilities allowed
the effect of the increase in asset volume to prevail, with a net effect of
Ch$24,635 million due to volume. The significant reductions in the average
nominal interest rate had a marked effect on both interest revenue and on
interest expense, and the net effect of such changes was a decrease of Ch$8,959
million in 2002.
Net interest revenue in 2001 increased 16.6% from 2000, a Ch$13,256 million
increase. Such increase was a net result of a 18.8% increase in the volume of
interest earning assets and of a 15.5% increase in the volume of interest
earning liabilities. The lower increase in interest bearing liabilities allowed
the effect of the increase in asset volume to prevail, with a net effect of
Ch$15,117 million due to volume. The variations in the average nominal interest
rate had a marked effect on both interest revenue and on interest expense, but
since both effects offset each other, the net effect of the variations in the
average nominal interest rate was a decrease of Ch$1,862 million in 2001.
Our net interest margin (net interest revenue over average interest earning
assets) decreased from 4.22% in 2001 to 3.28% in 2002, primarily due to the
decrease in the average interest rate earned, mainly as a result of a decrease
in the market rates in a context of stable inflation rate which was not offset
by the changes in the loan portfolio composition. Our net interest margin
decreased from 4.30% in 2000 to 4.22% in 2001, primarily due to a 16.6% increase
in net interest revenue that was more than offset by the 18.8% growth in average
interest earning assets due to the decreasing interest rates.
Interest Revenue
The following table sets forth information as to our interest revenue and
average interest earning assets for the years ended December 31, 2000, 2001 and
2002:
Year ended December 31, % Change
----------------------- --------
2000 2001 2002 2001/2000 2002/2001
---- ---- ---- --------- ---------
(in millions of constant Ch$ of December 31, 2002)
Interest revenue................. 225,990 218,194 216,464 (3.4)% (0.8)%
Average interest earning assets:
Loans............................ 1,498,449 1,739,619 1,897,359 16.1 9.1
Investments...................... 336,614 444,385 511,591 32.0 15.1
Interbank deposits 25,467 26,969 34,522 5.9 28.0
--------- --------- --------- --------- ---------
Total 1,860,530 2,210,973 2,443,472 18.8% 10.5%
========= ========= ========= ========= =========
Average nominal interest rates 12.1% 9.9% 8.90% -- --
The following table sets forth the effect on our interest revenue of
changes in (i) the average volume of interest earning assets, and (ii) average
nominal interest rates during the relevant periods:
2001/2000 2002/2001
Increase (decrease) Increase (decrease)
------------------- -------------------
(in millions of constant Ch$ of December
31, 2002)
----------------------------------------
Due to changes in average volume of interest earning assets....... 28,174 20,913
Due to changes in average nominal interest rates.................. (35,981) (22,632)
74
2001/2000 2002/2001
Increase (decrease) Increase (decrease)
------------------- -------------------
(in millions of constant Ch$ of December
31, 2002)
----------------------------------------
Net change........................................................ (7,807) (1,719)
Interest revenue in 2002 decreased 0.8% from 2001. The decrease in interest
revenue is primarily the result of an increase in average interest earning
assets that was offset by a 100 bp decrease in average nominal interest rates,
which was due to a stabilization in the annual rate of inflation, a decrease in
the Central Bank reference interest rate and a low activity environment. In
accordance with the strategy established by us, the higher growth operations
within the loan portfolio continued to be the Crediton and the Hipotecon. See
"Business Overview-Retail Market: Middle and Lower-Middle Income Individuals".
See "Selected Statistical Information--Loan Portfolio". The positive impact on
interest revenue resulting from the increase in average interest earning assets
went together with a negative impact of changes in average nominal interest
rates.
Interest revenue in 2001 decreased 3.4% from 2000. The decrease in interest
revenue was primarily the result of a 220 bp decrease in average nominal
interest rates, which was due to a reduction in the annual rate of inflation,
and a decrease in the Central Bank reference interest rate. In accordance with
the strategy established by us, the higher growth operations within the loan
portfolio were the Crediton and the Hipotecon. See "Business Overview --Retail
Market: Middle and Lower-Middle Income Individuals". In fact, the average
balance of consumer loans grew 19.5% and the average balance of mortgage loans
diminished 3.9%. See "Selected Statistical Information--Loan Portfolio". The
positive impact on interest revenue resulting from the increase in average
interest earning assets was more than offset by a decrease in average nominal
interest rates, which was attributable to a reduction in the rate of inflation
from 2000 to 2001 and to the reduction of the overnight interest rate.
Interest Expense
The following table sets forth our interest expense, average interest
bearing liabilities and average non-interest bearing demand deposits for the
years ended December 31, 2000, 2001 and 2002:
Year ended December 31, % Change
------------------------------------ ------------------------
2000 2001 2002 2001/2000 2002/2001
---- ---- ---- --------- ---------
(in millions of constant Ch$ of December 31, 2002)
Interest expense............................ 145,911 124,852 107,450 (14.4)% (13.9)%
Average interest bearing liabilities:
Deposits(1)................................. 818,171 1,001,078 1,211,188 22.4 21.0
Mortgage finance bonds(2)................... 259,999 251,483 247,046 (3.3) (1.8)
Other interest bearing liabilities(3)....... 462,837 527,698 557,695 14.0 5.7
-- ------- ------- ------- ---- ---
Total....................................... 1,541,007 1,780,259 2,015,929 15.5 13.2
========= ========= =========
Average nominal interest rates.............. 9.05 7.00 5.30
Average non-interest bearing demand
deposits................................. 338,579 378,046 419,339 11.7% 10.9%
- ----------------------
(1) Combines "Savings accounts" and "Time deposits" shown in the tables set
forth under "Selected Statistical Information--Average Balance Sheets and
Interest Rate Data".
(2) Unsecured bonds with maturities ranging from five to 30 years, the proceeds
of which are used to fund mortgage lending.
(3) Combines "Central Bank borrowings", "Securities sold under agreements to
repurchase" and "Other interest bearing liabilities" shown in the tables
set forth under "Selected Statistical Information--Average Balance Sheets
and Interest Rate Data".
The following table sets forth the effect on our interest expense of
changes in (i) average volume of interest bearing liabilities, and (ii) average
nominal interest rates during the relevant periods:
75
2001/2000 2002/2001
Increase (decrease) Increase (decrease)
------------------- -------------------
(in millions of constant Ch$
of December 31, 2002)
Due to changes in average volume of interest bearing liabilities........ 13,057 (3,722)
Due to changes in average nominal interest rates........................ (34,122) (13,674)
Net change.............................................................. (21,065) (17,396)
Interest expense in 2002 decreased 13.9% from 2001, despite the 21%
increase in average interest bearing deposits, mainly concentrated in time
deposits, and primarily as a result of a 191 bp decrease in the average nominal
interest rate paid by us on such liabilities. Such effects are accompanied by a
10.9% increase in non-interest bearing demand deposits, mainly concentrated in
checking accounts, and by further reductions on the Central Bank reference
interest rates. The effect of the decrease in the average nominal interest rate
paid by us amounted to Ch$(13,674) million, more than offsetting the Ch$(3,722)
million effect of the increase in the average volume of interest bearing
liabilities. Within deposits, time deposits, which represent close to 73% of
total deposits, increase 22.3% whereas savings accounts increase 0.1%. See
"--Overview".
Interest expense in 2001 decreased 14.4% from 2000, primarily as a result
of an 11.7% increase in non-interest bearing demand deposits, mainly
concentrated in checking accounts, by a 195bp decrease in the average nominal
interest rate paid by us on such liabilities and by further reductions on the
Central Bank reference interest rates. Such effects are partially offset by the
22.4% increase in average interest bearing demand deposits, mainly concentrated
in time deposits. The effect of the decrease in the average nominal interest
rate paid by us amounted to Ch$(34,122) million, more than compensating for the
Ch$13,057 million effect of the increase in the average volume of interest
bearing liabilities Within deposits, time deposits, which represent close to 60%
of total deposits, increased 23.5% whereas savings accounts increased 5.7%. See
"Operating Results--Overview".
Provision for Loan Losses
Chilean banks are required to maintain reserves to cover possible credit
losses that at least equal their loans to customers multiplied by the greater of
(i) their risk index or (ii) 0.75%. The risk index is derived from management's
classification of our portfolio according to objective criteria relating to the
performance of the loans or, in the case of commercial loans, management's
estimate of the likelihood of default. Banks in Chile are also required to
establish individual loan loss reserves for loans that are more than 90 days
past due. The amount of the individual loan loss reserves is equal to 100% of
the unsecured past due portion of the loan if such amounts in the aggregate
exceed the global loan loss reserve. See "Business Overview--Selected
Statistical Information--Classification of Loan Portfolio" and "--Selected
Statistical Information--Loan Loss Reserves". Banks in Chile are also required
to maintain additional consumer loan loss reserves as a result of the new
provisioning requirements for consumer loans set by the Superintendency of
Banks. See "Business Overview --Chilean Regulation And Supervision--Recently
Enacted Banking Legislation--Allowance Requirements for Consumer Lending". A
bank may also maintain voluntary additional loan loss reserves in excess of the
minimum amounts required as global and individual loan loss reserves. Provisions
to such voluntary reserves are not deducted from income for tax purposes.
The following table sets forth information about us with respect to the
allowance for loan losses and its principal components, provision for loan
losses and charge-offs, at and for each of the years ended December 31, 2000,
2001 and 2002, respectively:
December 31, % Change
---------------------------------------- -------------------------
2000 2001 2002 2001/2000 2002/2001
---- ---- ---- --------- ---------
(in millions of constant Ch$ of December 31, 2002, except for percentages)
Provisions for loan losses....... 24,459 31,556 31,316 29.0% (0.8)%
Charge-offs...................... (23,759) (23,950) (28,274) 0.8 18.0
76
December 31, % Change
---------------------------------------- -------------------------
2000 2001 2002 2001/2000 2002/2001
---- ---- ---- --------- ---------
(in millions of constant Ch$ of December 31, 2002, except for percentages)
Total loans........................... 1,704,486 1,841,159 2,098,564 8.0 14.0
Risk index......................... 2.03 1.82 1.67 (10.3)
Required allowance for loan
losses based on risk index ...... 34,601 33,509 35,046 (3.2) 4.0
Allowance for loan losses ......... 38,273 43,264 45,045 13.0% 4.1%
Allowance for loan losses as
a percentage of total loans ..... 2.25 2.35 2.15
The amount charged to income as provision for loan losses decreased 0.8% to
Ch$31,316 million in 2002 from Ch$31,556 million in 2001. This decrease was
primarily explained by an improvement in portfolio quality due to three years of
applying more demanding criteria in loan origination and in the implementation
of credit scoring, offset by the falling into past due of a specific set of
loans (already classified as low quality loans).
As a result of this improvement in portfolio quality, our risk index
decreased from 1.82% at December 31, 2001 to 1.67% at December 31, 2002. In
addition, 95.4% of our loans were category A and category B loans in 2002,
compared to 94.8% in 2001. See "Selected Statistical Information--Analysis of
Our Loan Classifications".
The amount charged to income as provisions for loan losses was offset in
part by the increase in the required allowance for loan losses based on risk
index, due to the increase in loan volume. The net effect on our coverage level
decreased the level of allowances for loan losses over the loan portfolio from
2.35% in 2001 to 2.15% in 2002. When compared with past due loans, allowances
for loan losses represented 126.0% of past due loans in 2000 and 111.9% in 2001.
Our policy of over 100% coverage was exceeded as we achieved 109.0% coverage at
year end 2002.
Mainly as a result of the changes in our loan classification, BBVA Chile's
risk index was 1.67% at December 31, 2002, down from 1.82% at December 31, 2001
and from 2.03% at December 31, 2000, compared to an average risk index for the
Chilean financial system of 2.0% at October 31, 2002 (the most recent available
information for the industry), 1.90% at October 31, 2001 and 2.08% at October
31, 2000. For a discussion of our policies and practices regarding loan loss
provisions and allowances, see "Business Overview--Selected Statistical
Information--Allowance for Loan Losses".
The amount charged to income as provisions for loan losses increased 13.0%
to Ch$43,263 million in 2001 from Ch$38,273 million in 2000. This increase was
primarily the result of the use of voluntary allowances and of an improvement in
portfolio quality due to the application of the new criteria and procedures. See
"Selected Statistical Information--Analysis of Our Loan Classifications".
In the fourth quarter of 1998, soon after the BBVA Group took control of
us, we conducted an extensive revision of our loan portfolio, which resulted in
an extensive cleanup and downgrading of a part of our portfolio and in an 86.9%
increase in charge-offs in 1998. The economic recession that affected the
country over the 1998-1999 period caused a significant loan quality
deterioration across the Chilean banking industry and is mostly responsible for
the 29.7% increase of charge-offs in 1999. In light of these events, with the
aim of reaching a level of allowances for loan losses that would be adequate
even if conditions worsened, we established in 1999 additional (voluntary)
allowances for an amount of Ch$5,180 million.
Other Income
Income from Services, Net. The following table sets forth the components of
our income from services, net for the years ended December 31, 2000, 2001 and
2002:
77
Year ended December 31, % Change
--------------------------------------- -------------------------
2000 2001 2002 2001/2000 2002/2001
---- ---- ---- --------- ---------
(in millions of constant Ch$ of December 31, 2002, except for percentages)
Fees from services:
Commissions on insurance brokerage ....... 1,588 1,951 2,170 22.9% 11.2%
Credit cards ............................. 1,144 1,299 1,275 13.5% (1.8)%
Current accounts ......................... 2,898 4,839 4,459 67.0% (7.9)%
Pension payments ......................... 1,043 2,719 3,840 160.7% 41.2%
Contingent loans and letters of credit ... 623 1,001 762 60.7% (23.9)%
Automatic teller machines ................ 1,059 541 1,596 (48.9)% 195.0%
Collections .............................. 798 389 354 (51.3)% (9.0)%
Purchases and sales of foreign
exchange ................................. 142 214 272 50.7% 27.1%
Lines of credit and overdrafts ........... 919 484 675 (47.3)% 39.5%
On-line accounts ......................... 312 210 169 (32.7)% (19.5)%
Custody and Trust services ............... 57 59 130 3.5% 120.3%
Service charges on deposit accounts ...... 226 206 204 (8.8)% (1.0)%
Service charges on loans ................. 536 380 534 (29.1)% 40.5%
Fees from collections of insurance
premiums ................................. 1,199 1,260 1,507 5.1% 19.6%
Loan and securities collections .......... 153 - - (100.0)% -
Brokerage fees ........................... 553 610 737 10.3% 20.8%
Commissions on mutual and investment
Funds administration ................... 2,176 2,301 2,578 5.7% 12.0%
Lease contracts fees ..................... - 474 483 - 1.9%
Financial advisory services .............. 306 432 - 41.2% (100.0)%
Fees charged on prepaid loans ............ 1 573 1,645 57200.0% 187.1%
Other .................................... 902 2,340 2,944 159.4% 25.8%
------ ------ ------ ---- ----
Total income from services ......... 16,635 22,282 26,334 33.9% 18.2%
====== ====== ====== ==== ====
Services expenses
Brokerage expenses ....................... (64) (74) (39) 15.60% (47.30)%
Brokerage fees ........................... (360) (331) (305) (8.10)% (7.90)%
Credit card operators .................... (613) (778) (1,017) 26.90% 30.70%
Automatic teller machines ................ (791) (873) (1,031) 10.40% 18.10%
Collection expenses ...................... (19) (12) (20) (36.80)% 66.70%
Commissions on placement and (30.40)%
servicing of loans ....................... (2,833) (2,553) (1,777) (9.90)%
Other .................................... (160) (433) (383) 170.60% (11.50)%
Total services expenses ............ (4,840) (5,054) (4,572) 4.40% (9.50)%
Income from services, net ... 11,795 17,228 21,762 46.1% 26.3%
Our net income from services increased 26.3% to Ch$21,762 million in 2002
from Ch$17,228 million in 2001. This increase was primarily the result of (i) a
41.2% increase in commission on pension payments to Ch$3,840 million in 2002
from Ch$2,719 million in 2001; (ii) a 187.1% increase in fees charged on prepaid
loans to Ch$1,645 million on 2002 from Ch$573 million on 2001; and (iii) a 195%
increase in commissions from Automatic Teller Machines to Ch$1,596 million in
2002 from Ch$541 million in 2001. These increases were partially offset by (i) a
Ch$432 million decrease in fees form financial advisory services and (ii) a 7.9%
decrease in fees and commissions on current accounts to Ch$4,459 million in 2002
from Ch$4,839 million in 2001. See "Business Overview--Lines of Business--Retail
Banking".
Our net income from services increased 46.1% to Ch$17,228 million in 2001
from Ch$11,795 million in 2000. This increase was primarily the result of (i) an
67% increase in commission on current accounts to Ch$4,839 million in 2001 from
Ch$2,898 million in 2000 and (ii) a Ch$1,676 million increase in commissions on
pension payments to
78
Ch$2,719 million in 2001 from Ch$1,043 million in 2000. These increases were
partially offset by: (i) a Ch$518 million decrease in commissions from Automatic
Teller Machines and (ii) a 47.3% decrease in fees from lines of credit and
overdrafts.
The commission on pension payments stems from a clause in the pension
payment contract that states that a commission is due if the balances held at
the bank fall below a previously established level. This condition was met for
the first time in 1999.
For information related to our lines of businesses, see Note 28.2.e)
("Segment Information") to the Consolidated Financial Statements.
Other Operating Income, Net. The following table sets forth the components
of our other operating income, net for the years ended December 31, 2000, 2001
and 2002:
Year ended December 31, % Change
----------------------------------- ------------------------
2000 2001 2002 2001/2000 2002/2001
---- ---- ---- --------- ---------
(in millions of constant Ch$ of December 31, 2002)
Gains (losses) on financial
instruments, net................... 3,951 8,554 6,140 116.5% (28.2)%
Foreign exchange
transactions, net.................. 1,377 (4,162) (14,335) (402.2) 244.4
----- ----- ------ ------ ------
Other operating income, net........... 5,328 4,392 (8,195) (17.6)% (286.6)%
===== ===== ====== ====== ======
In 2002, we recorded a loss of Ch$225 million in our other operating
income, net, primarily due to gains on financial instruments due to the
declining interest rates and to losses in foreign exchange transactions. The
latter losses were a result of the high volatility exhibited by the exchange
rate, particularly over specific periods of the year.
In 2001, we recorded a gain of Ch$4,392 million in other operating income,
net, due to the losses obtained from foreign exchange transactions and gains on
financial instruments. This gain was also in a period of high volatility
exhibited by the exchange rate, particularly in the first quarter of the year.
Other Income and Expenses. The following table sets forth the principal
components of our other income and expenses for the years ended December 31,
2000, 2001 and 2002:
Year ended December 31, % Change
--------------------------------- ----------------------
2000 2001 2002 2001/2000 2002/2001
---- ---- ---- --------- ---------
(in millions of constant Ch$ as of December 31, 2002)
Recoveries of loans previously charged 7,573
off....................................... 7,420 9,679 (2.0)% 30.4
Recoveries of loans reacquired from the 101
Central Bank.............................. 80 17 (20.8) (78.8)
Subtotal..................................... 7,674 7,500 9,696 (2.3) 29.3
Non-operating income......................... 2,866 3,948 4,776 37.7 31.0
Non-operating expenses.......................(2,845) (2,821) (3,723) (0.8) 32.0
Subtotal..................................... 21 1,127 1,053 5,266.7 (6.6)
Participation in earnings of equity
investments............................... (36) (34) 116 (5.6) -
----- ----- ------ ---- ----
Total........................................ 7,659 8,593 10,865 12.2% 26.4%
===== ===== ====== ==== ====
Recoveries of Loans Previously Charged Off. Recoveries of loans previously
charged off amounted to Ch$10,865 million in 2002, up from Ch$8,592 million in
2001. Recoveries of loans reacquired from the Central Bank previously charged
off, which will tend to decrease as the total amount of such loans decreases,
accounted for
79
approximately 0.2% of total recoveries in 2002. The increase in
recoveries of loans previously charged off during 2002 comes from of a continued
effort by us, and is a result of the economic conditions prevailing over the
year and of the increase in the number of operational loans charged off in
recent years.
Other. In 2002 non-operating income increased by 21% while non-operating
expenses increased by 32% from 2001 levels. Such decrease in net non-operating
income is mostly explained by the higher level of non-operating income attained
in 2002, through an increase in the sale of assets received in lieu of payment,
offset by the higher level of non-operating expenses. In 2001, non-operating
income increased by 37.8% while non-operating expenses decreased by 0.8% from
2000 levels. The increase in net non-operating income in 2001 was attributable
principally to a decrease in losses on the sale of assets received in lieu of
payment and other assets.
Operating Expenses
The following table sets forth the principal components of our operating
expenses for the years ended December 31, 2000, 2001 and 2002:
Year ended December 31, % Change
------------------------------------ ----------------------
2000 2001 2002 2001/2000 2002/2001
---- ---- ---- --------- ---------
(in millions of constant Ch$ as of December 31, 2002)
Personnel salaries and expenses.......... 28,555 33,099 33,118 15.9% 0.1%
Administrative and other expenses........ 26,676 28,143 29,049 5.5 3.2
Depreciation and amortization............ 6,843 10,053 12,992 46.9 29.2
------ ------ ------ ---- ----
Total................................. 62,074 71,295 75,159 14.9% 5.4%
====== ====== ====== ==== ====
The 5.4% increase in operating expenses to Ch$75,159 million in 2002 from
Ch$71,295 million in 2001 was primarily the result of a 29.2% increase in
depreciation and amortization and of a 3.2% increase in administrative and other
expenses. Such increase in operating expenses is mostly due to the significant
investments made in technology with the implementation of the new "Altamira"
systems platform.
The 14.9% increase in operating expenses to Ch$71,295 million in 2001 from
Ch$62,074 million in 2000 was primarily the result of a 15.9% increase in
personnel expenses directly related to extraordinary disbursements related to a
two week strike in March and to the investment in technology with the
implementation of the new "Altamira" systems platform.
Loss from Price-level Restatement
The net effect of the restatement of price-levels gave rise to a charge to
net income of Ch$5,387 million, Ch$4,464 million and Ch$4,164 million in 2000,
2001 and 2002, respectively. See Note 22 to the Consolidated Financial
Statements.
Year ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
(in millions of constant Ch$ as of December 31,
2002)
Restatement of non-monetary accounts based on CPI:
Bank premises and equipment.................................... 2,533 1,850 1,806
Other non-monetary assets and liabilities, net................. 876 808 930
Shareholders' equity........................................... (8,797) (7,122) (6,900)
------ ------ ------
Net price-level restatement (loss)............................. (5,388) (4,464) (4,164)
====== ====== ======
Income Tax
Our effective tax rate was (15.4)% in 2000, (5.4)% in 2001 and (11.1)% in
2002 compared to an average rate which we estimate to be (7.0)% in 2000, (6.6)%
in 2001 and 14.0% in 2002 for Chilean financial institutions as a whole for such
periods. Excluding the effect of the deferred income taxes recorded against
income in 2002 (See
80
Note 1.l) to the Consolidated Financial Statements), our effective tax rate
would have been 16% in 2002. The statutory rate on most of our income during
these three years was 15%, 15% and 16% respectively. Our effective tax rate was
different from the statutory rate primarily because of the amortization of the
effects of adopting deferred income tax accounting in 2001. See Note 23 to the
Consolidated Financial Statements.
US GAAP Reconciliation
We prepare our financial statements in accordance with Chilean GAAP, which
differs in certain significant respects from US GAAP. The following table sets
forth net income for the years ended December 31, 2000, 2001 and 2002 under
Chilean GAAP and US GAAP and shareholders' equity (including net income for the
year) at December 31, 2000, 2001 and 2002 under Chilean GAAP and US GAAP.
At or for the year ended December 31
------------------------------------
2000 2001 2002
---- ---- ----
(in millions of constant Ch$ of
December 31, 2002)
Net income (Chilean GAAP)........................................... 14,456 15,335 20,255
Net income (US GAAP)............................................... 9,227 15,619 16,917
Shareholders' equity (Chilean GAAP)................................. 242,860 250,120 257,022
Shareholders' equity (US GAAP)...................................... 244,874 252,353 255,345
The principal differences which affect net income under Chilean GAAP and US
GAAP relate to deferred income taxes and amortization of goodwill. The principal
differences in accounting for shareholders' equity relate to loan origination
fees and costs, amortization of goodwill on acquisition of Banesto Chile Bank,
deferred income taxes and the accrual for mandatory dividends. Note 28 to the
Consolidated Financial Statements provides a description of the principal
differences between Chilean GAAP and US GAAP and a reconciliation to US GAAP of
net income for the years ended December 31, 2000, 2001 and 2002 and of
shareholders' equity at December 31, 2001 and 2002.
Asset and Liability Management
We follow conservative policies and procedures for the management of our
assets and liabilities, both in terms of their maturities and currencies. These
policies have resulted in the formation of an adequate financing structure to
meet our increasing needs during our current expansion. In addition to the
guidelines established by the Superintendency of Banks and the Central Bank to
manage asset/liability mismatches, the Board of Directors together with the
General Manager (our chief executive officer) have implemented additional
procedures, such as limits for gaps in different currencies, trading stop
losses, investments and approval authorities, to control our asset/liability
position. Generally, the Finance and International Division Manager is in charge
of the implementation of our policies in this respect. Further, we distribute
three reports prepared by the Planning and Development Division to our senior
management on a daily basis: (i) Foreign Exchange Position, which reflects
potential gaps, (ii) Limits and Margins in Local Currency, which controls the
margins established by the external/internal authorities, and (iii) Assets and
Liabilities Management Report, which summarizes our position in terms of
maturities and currencies.
The composition of our assets and liabilities by currency and term and our
shareholders' equity at December 31, 2002 was as follows:
Foreign
Ch$ UF(1) Currency(2) Total Percentage
--- ----- ----------- ----- ----------
(in millions of constant Ch$ of December 31, 2002, except for
percentages)
Assets
Cash and due from banks .............. 285,561 - 25,462 311,023 9.73
Other assets:
Less than one year ................... 588,411 297,914 658,999 1,545,324 48.35
From one to three years............... 4,131 31,737 18,884 54,752 1.71
81
Foreign
Ch$ UF(1) Currency(2) Total Percentage
--- ----- ----------- ----- ----------
(in millions of constant Ch$ of December 31, 2002, except for
percentages)
More than three years................. 223,468 848,665 202,349 1,274,482 39.87
Bank premises and equipment and other. 55,668 55,668 1.74
Allowance for loan losses............. (45,045) (45,045) (1.40)
--------- --------- ------- --------- ------
Total............................. 1,056,526 1,233,984 905,694 3,196,204 100.00
========= ========= ======= ========= ======
Percentage of total assets............ 33.06 38.61 28.33 100.00
Liabilities and Shareholders' Equity
Non-interest bearing deposits......... 422,872 18,915 16,014 457,801 14.32
Other liabilities:
Less than one year.................... 589,620 61,211 771,890 1,422,721 44.51
From one to three years............... 140,507 369,030 111,597 621,134 19.43
More than three years................. 11,075 424,489 1,962 437,526 13.69
Shareholders' equity.................. - 236,767 - 236,767 7.41
Net income............................ - 20,255 - 20,255 0.64
--------- --------- ------- --------- ------
Total............................. 1,164,074 1,130,667 901,463 3,196,204 100.00
========= ========= ======= ========= ======
Percentage of total liabilities and
shareholders' equity................ 36.42 35.38 28.20 100.00
- ----------------------
(1) Includes monetary assets and liabilities denominated in UF and nonmonetary
assets, liabilities and shareholders' equity restated for inflation for
accounting purposes.
(2) Includes assets and liabilities denominated in foreign currency, Foreign
currency assets consist of U.S. dollars (53.1%), Japanese yen (0.5%), Euros
(0.4%), and other currency (0.0%). Foreign currency liabilities consist of
U.S. dollars (99.1%), Japanese yen (0.5%), Euros (0.3%), and other currency
(0.0%).
We typically have more Chilean peso-denominated liabilities than Chilean
peso-denominated assets because our deposits, one of our principal sources of
funding, are denominated in Chilean pesos. See "Operating Results--Overview".
Exchange Rate Risk
At December 31, 2002, our net foreign currency exposure was Ch$4,231
million (US$5.9 million), equal to 1.65% of our capital and reserves. See Note
24 to the Consolidated Financial Statements, "--Asset and Liability Management"
and "Business Overview--Chilean Regulation and Supervision--Foreign Exchange".
In recent years, our results of operations have not been significantly
affected by fluctuations in the exchange rate between the Chilean peso and the
U.S. dollar in part due to our policy and Central Bank regulations relating to
the control of material exchange rate mismatches. However, the rate of
depreciation or appreciation of the Chilean peso against the U.S. dollar could
be expected to have the following principal effects:
(i) If we maintain a net asset position in U.S. dollars and a
depreciation of the Chilean peso against the dollar occurs, we would record
a related gain, and if an appreciation of the Chilean peso occurs, we would
record a related loss;
(ii) If we maintain a net liability position in U.S. dollars and a
depreciation of the Chilean peso against the dollar occurs, we would record
a related loss, and if an appreciation of the Chilean peso occurs, we would
record a related gain;
(iii) If the inflation rate for a period exceeded the depreciation of the
Chilean peso against the U.S. dollar during the same period, we would
record a related gain if we had a net asset position in UF which exceeded a
net liability position in U.S. dollars, and we would record a related loss
if we had a net liability position in U.S. dollars which exceeded a net
asset position in UF. The same effect would occur if there were an
appreciation of the Chilean peso against the U.S. dollar; and
82
(iv) If the inflation rate for a period were lower than the rate of
depreciation of the Chilean peso against the U.S. dollar during the same
period, we would record a related gain if we maintained a net asset
position in U.S. dollars and a net liability position in UF and would
record a related loss if we had a net liability position in U.S. dollars
and a net asset position in UF. The same effect would occur if there were
an appreciation of the Chilean peso against the U.S. dollar.
The following table sets forth our foreign currency position.
Assets Liabilities
-------------- -----------
(in millions of constant Ch$ of
December 31, 2002)
Currency
US Dollars............................. 480,715 893,408
Ch$ readjusted by US$.................. 417,333 760
Japanese Yen........................... 4,204 4,157
Euro................................... 3,183 3,110
Other Currency......................... 259 28
------- -------
Total.................................. 905,694 901,463
======= =======
We have exchange rate exposure with respect to t
lesser extent, other currencies. The potential immediate loss that would result
from a hypothetical 10% change in foreign currency exchange rates based on this
position would be Ch$423 million. This sensitivity analysis assumes an
unfavorable 10% fluctuation in all of the exchange rates affecting all the
foreign currencies in which the assets and liabilities presented in the table
above are denominated.
We enter into forward exchange contracts which are fundamentally of two
types: (i) transactions between two foreign currencies, and (ii) transactions
among Chilean pesos, UF and U.S. dollars. The first type are done for hedging
purposes, such as when we take a liability position in foreign currency other
than the U.S. dollar; the second type, which are carried out only in the Chilean
local market, are utilized to take selling positions (liabilities) in foreign
currency, subject to the regulatory requirement that the forward foreign
currency exposure must be included in the maximum net foreign currency position
permitted by applicable regulations. See "Business Overview--Chilean Regulation
and Supervision--Foreign Exchange" and "Description of Business--Selected
Statistical Information--Average Balance Sheets and Interest Rate Data".
B. Liquidity and Capital Resources
Securitization
On July 4, 2002, our subsidiary BBVA BHIF Residential Leasing securitized
381 leasing contracts, amounting to Ch$5,219 million (US$7.3 million) in assets.
The instruments were sold for Ch$7,015 million (US$9.8 million), and the effect
on BBVA BHIF Residential Leasing's net income was Ch$1,318 million (US$1.8
million).
Maturity of Deposits at December 31, 2002
The following table sets forth information regarding the currency and
maturity of our deposits at December 31, 2002, expressed in percentages.
UF-denominated deposits are similar to Chilean-peso denominated deposits in all
respects, except that the principal is readjusted periodically based on
variations in the Chilean CPI.
Foreign
Ch$ UF currency Total
--- -- -------- -----
Demand deposits.................................... 33.0 3.2 40.0 23.9
Saving accounts.................................... 9.7 3.0
Time deposits:
Maturity within 3 months........................... 45.7 21.8 54.2 38.5
Maturity after 3 but within 6 months............... 13.1 15.6 2.4 13.6
83
Maturity after 6 but within 12 months.............. 3.6 46.0 3.4 16.7
Maturity after 12 months........................... 4.6 3.7 - 4.3
-- ---- ---- ---- ----
Total time deposits................................ 67.0 87.1 60.0 73.1
==== ==== ==== ====
Total deposits..................................... 100% 100% 100% 100%
==== ==== ==== ====
The following table sets forth information regarding the maturity of
outstanding time deposits in excess of US$100,000 issued by us at December 31,
2002
Ch$ UF Foreign currency Total
--- -- ---------------- -----
Time deposits:
Maturity within 3 months...................... Ch$413,296 Ch$90,145 Ch$84,111 Ch$587,552
Maturity after 3 but within 6 months.......... 152,894 98,389 853 252,136
Maturity after 6 but within 12 months......... 43,931 261,512 1,240 306,683
Maturity after 12 months...................... 47,562 18,373 -- 65,935
---------- ---------- --------- ------------
Total deposits in excess of US$100,000........ Ch$657,683 Ch$468,419 Ch$86,204 Ch$1,212,306
========== ========== ========= ============
Minimum Capital Requirements
According to the current General Banking Law, banks must have a minimum
ratio of Total Capital to Risk Adjusted Assets of 8%, net of required allowances
for loans losses, and a minimum ratio of Basic Capital to Total Assets of 3%,
net of required allowances for loan losses. For these purposes, Total Capital
means the aggregate of: (a) a bank's paid-in capital and reserves, excluding
capital attributed to subsidiaries and foreign branches, (b) its subordinated
bonds, calculated at the issue price but not exceeding 50% of its Basic Capital,
and (c) its voluntary allowances for loan losses, up to 1.25% of the Risk
Adjusted Assets. Basic Capital includes paid-in capital and reserves, but
excludes the net income for the period. Risk Adjusted Assets are based on total
assets on an unconsolidated basis, which are then classified into five
categories, each of which has a different weight.
At December 31, 2002, in accordance with the requirements of the General
Banking Law, our ratio of Total Capital to Risk Adjusted Assets was 12.31% or
Ch$89,408 million higher than the 8% minimum required by the first test under
the Banking Law. Our ratio of Basic Capital to Total Assets was 7.38% or
Ch$140,564 million higher than the 3% minimum Basic Capital required by the
second test under the General Banking Law.
Our mutual fund and securities brokerage subsidiaries are also subject to
minimum capital requirements as defined under Chilean regulations. All such
minimum regulatory capital requirements were being complied with at December 31,
2000, 2001 and 2002.
Short-Term Borrowings
Our short-term borrowings (excluding other obligations) totaled Ch$388,063
million as of December 31, 2000, Ch$288,128 million as of December 31, 2001 and
Ch$385,460 million as of December 31, 2002.
The principal categories of our short-term borrowings are amounts borrowed
under repurchase agreements, , domestic interbank loans and foreign trade lines
of credit. The following table presents the amounts outstanding and the weighted
average nominal interest rate at the end of each year for each type of
short-term borrowing:
84
At December 31,
---------------------------------------------------------------------------
2000 2001 2002
---------------------- ---------------------- ---------------------
Weighted Weighted Weighted
average average average
nominal nominal nominal
Year end interest Year end interest Year end interest
Balance rate Balance rate Balance rate
------- ---- ------- ---- ------- ----
(in millions of constant Ch$ of December 31, 2002, except for percentages)
Securities sold under
agreements to repurchase...... 254,294 5.30% 172,624 6.48% 255,565 2.09%
Central Bank borrowings.......... 3,186 8.40 -- -- -- --
Domestic interbank loans......... 106,676 8.37 63,996 5.84 63,616 1.72
Borrowings under foreign
trade credit lines 23,907 6.35 51,508 2.05 66,279 1.73
------- ------- -------
Total short-term borrowings 388,063 6.23% 288,128 5.55% 385,460 1.97%
======= ======= =======
The following table shows the average balance and the average nominal rate
for each short-term borrowing category during the periods indicated.
For the year ended December 31,
--------------------------------------------------------------------------
2000 2001 2002
--------------------- -------------------- ---------------------
Average Average Average
nominal nominal nominal
Average interest Average interest Average interest
balance rate balance rate balance rate
------- ---- ------- ---- ------- ----
(in millions of constant Ch$ of December 31, 2002, except for percentages)
Securities sold under
agreements to repurchase....... 174,276 10.10% 210,622 8.34% 224,225 2.80%
Central Bank borrowings.......... 1,077 10.10 13,086 6.72 16,868 6.00
Domestic interbank loans......... 91,703 5.90 90,464 4.65 90,436 7.50
Subtotal......................... 267,056 -- 314,172 -- 331,529
Borrowings under foreign
trade credit lines 12,630 1.50 13,587 1.61 35,346 2.20
------- ------- -------
Total short-term borrowings 279,686 8.30% 327,759 6.98% 366,875 6.98%
======= ======= =======
The following table presents the maximum month-end balances of our
principal sources of short-term borrowings during the periods indicated.
Maximum 2000 Maximum 2001 Maximum 2002
month-end month-end month-end
balance balance balance
------------ ------------ ------------
(in millions of constant Ch$ of December 31, 2002)
Securities sold under agreements to repurchase............. 161,106 221,523 123,944
Domestic interbank loans................................... 96,954 73,109 99,800
Borrowings under foreign trade credit lines................ 49,960 59,442 131,606
Central Bank borrowings.................................... 7,954 7,076 27,472
Liquidity and Funding
The following table sets forth our average daily balance of liabilities for
the years ended December 31, 2001 and 2002, in each case together with the
related average nominal interest rates paid thereon:
85
Year ended December 31,
--------------------------------------------------------------------------
2001 2002
------------------------------------- ----------------------------------
Average Average
Average % of Total Nominal Average % of Total Nominal
Balance Liabilities Rate Balance Liabilities Rate
------- ----------- ---- ------- ----------- ----
(in millions of constant Ch$ of December 31, 2002, except for percentages)
Checking accounts.................... 179,066 7.6% -- 192,398 7.4%
Time deposits........................ 943,699 39.8 6.6 1,153,750 44.4% 4.8
Savings accounts..................... 57,379 2.4 5.4 57,438 2.2% 3.8
Mortgage finance bonds............... 251,483 10.6 9.7 247,046 9.5% 9.4
Foreign borrowings................... 70,443 3.0 2.3 111,038 4.3% 2.4
Bankers drafts and other demand
deposits.......................... 198,981 8.4 226,941 8.7%
Central Bank Borrowings.............. 26,014 1.1 7.2 16,868 0.6% 6.0
Securities subject to agreements to
repurchase........................ 210,621 8.9 7.3 224,225 8.6% 2.8
Subordinated bonds................... 31,160 1.3 7.2 30,935 1.2% 7.2
Other bonds.......................... 46,441 2.0 5.8 42,146 1.6% 5.9
Borrowings from domestic financial
institutions,..................... 143,021 6.0 6.5 132,483 5.1% 6.5
Contingent liabilities............... 69,729 2.9 -- 73,651 2.8% --
Other................................ 142,819 6.0 -- 91,456 3.6% --
------- --- ------ ---
Total liabilities............... 2,370,856 100.00% -- 2,600,375 100.00% --
========= ====== ========= ======
We, through our liquidity management, seek to ensure our ability to honor
withdrawals of deposits, make repayments at maturity of other liabilities,
extend loans and meet our own working capital needs. Our most important source
of funding is our customer deposits (which consist primarily of Chilean
peso-denominated non-interest bearing checking accounts and Chilean peso- and
UF-denominated interest bearing time and savings deposits). Checking account
deposits are the least expensive source of funding and represented approximately
7.4% of our total average liabilities for the year ended December 31, 2002. Time
deposits represented 44.4% of our total average liabilities for year ended
December 31, 2002.
As part of our overall business strategy, we seek to minimize our cost of
funding by broadening our deposit base, particularly checking account balances,
by cross-selling to existing customers and by broadening our customer base. See
"Business Overview--Business Strategy".
Mortgage Finance Bonds are issued to fund residential mortgage loans and
certain of our commercial mortgage loans. Mortgage Finance Bonds have payment
terms matched to the related loans and bear interest at a fixed rate. See
"Business Overview--Lines of Business--Retail Banking--Residential Mortgage
Lending". Foreign borrowings, which are used primarily in connection with our
foreign trade operations, are mainly dollar-denominated short-term loans. See
Note 12 to the Consolidated Financial Statements.
Central Bank borrowings constitute our fourth source of liquidity. The
Central Bank provides credit to Chilean banks on a long-term basis to permit
dollar- and UF-denominated financing of industrial and agricultural projects.
The Central Bank also makes short-term credit lines, that generally mature
within five days, available to banks to assist in liquidity management.
Generally, we rely upon all sources of funding, choosing funding sources at
any given time on the basis of cost and availability, in the light of our
general asset and liability management strategy. The minimum amount of liquidity
required by us is determined by the reserve requirements of the Central Bank.
See "Business Overview--Chilean Regulation and Supervision--Reserve
Requirements". These reserves are currently 3.6% of time deposits and 9% of
demand deposits. In addition, we are subject to a technical reserve requirements
(the reserva tecnica) pursuant to which a certain amount must be held in cash or
in highly liquid instruments. This amount is equal to the amount by which the
amounts on deposit in checking accounts and in instruments that mature in less
than 10 days exceed by 2.5 times our capital and reserves. The Central Bank
imposes a uniform reserve requirement of 13.6% with respect to foreign
currency-denominated liabilities. In June 1998, the Central Bank announced a
reduction in
86
this reserve requirement from 30% to 10% and in September 1998 announced a
further reduction from 10% to 0%. We are able to recover the costs of
maintaining these reserves on foreign currency-denominated liabilities by
charging higher rates on foreign currency-denominated loans. Liquidity is also
derived from our capital, reserves, subordinated bonds and investments,
including government securities.
Interest Rate Sensitivity
A key component of our asset and liability policy is the management of
interest rate sensitivity. Interest rate sensitivity is the relationship between
market interest rates and net interest revenue due to the maturity or repricing
characteristics of interest earning assets and interest bearing liabilities. For
any given period, the pricing structure is matched when equal amounts of such
assets and liabilities mature or reprice in that period. Any mismatch of
interest earning assets and interest bearing liabilities is known as a gap
position. A positive gap denotes asset sensitivity and normally means that an
increase in interest rates would have a positive effect on net interest revenue
while a decrease in interest rates would have a negative effect on net interest
revenue.
Our interest rate sensitivity strategy takes into account not only the
rates of return and the underlying degree of risk, but also liquidity
requirements, including minimum regulatory cash reserves, mandatory liquidity
ratios, withdrawal and maturity of deposits, capital costs and additional demand
for funds. Our maturity mismatches and positions are monitored by us and are
managed within established limits.
The following table sets forth the repricing of our interest earning assets
and our interest bearing liabilities at December 31, 2002 and may not be
indicative of interest rate gap positions at other times.
Interest Rate Sensitivity
-------------------------
Up to 31-90 91-180 181-365 Over 3
30 days days days days 1-3 years years Total
-------- -------- -------- ------- --------- ------- ---------
(in millions of constant Ch$ of December 31, 2002, except for percentages)
Interest earning assets(1)
Ch$..................... 167,900 152,327 64,406 81,729 118,964 103,702 689,028
UF...................... 124,467 139,365 132,810 182,397 143,429 428,681 1,151,149
Foreign Currency........ 87,531 71,806 88,426 139,089 224,983 207,740 819,575
-------- -------- -------- ------- ------- ------- ---------
Total................. 379,898 363,498 285,642 403,215 487,376 740,123 2,659,752
======== ======== ======== ======= ======= ======= =========
Interest bearing
liabilities(2)
Ch$..................... 329,020 254,765 167,295 45,475 52,830 6,800 856,185
UF...................... 130,452 89,488 124,919 295,404 75,780 238,001 954,044
Foreign Currency........ 291,213 52,920 79,891 83,850 5,185 92 513,151
-------- -------- -------- ------- ------- ------- ---------
Total................. 750,685 397,173 372,105 424,729 133,795 244,893 2,323,380
======== ======== ======== ======= ======= ======= =========
Asset/liability Gap
Ch$..................... (161,120) (102,438) (102,889) 36,254 66,134 96,902 (167,157)
UF...................... (5,985) 49,877 7,891 (113,007) 67,649 190,680 197,105
Foreign Currency........ (203,682) 18,886 8,535 55,239 219,798 207,648 306,424
-------- -------- -------- ------- ------- ------- --------
Total................. (370,787) (33,675) (86,463) (21,514) 353,581 495,230 336,372
======== ======== ======== ======= ======= ======= ========
Cumulative Gap
Ch$..................... (161,120) (263,558) (366,447) (330,193) (264,059) (167,157)
UF...................... (5,985) 43,892 51,783 (61,224) 6,425 197,105
Foreign Currency........ (203,682) (184,796) (176,261) (121,022) 98,776 306,424
-------- -------- -------- ------- -------- --------
Total................. (370,787) (404,462) (490,925) (512,439) (158,858) 336,372
======== ======== ======== ======== ======== ========
Ratio of cumulative gap to
cumulative total interest
earning assets
Ch$..................... (95.96%) (82.30%) (95.27%) (70.80%) (45.11%) (24.26%)
UF...................... (4.81%) 16.64% 13.06% (10.57%) 0.89% 17.12%
87
Interest Rate Sensitivity
-------------------------
Up to 31-90 91-180 181-365 Over 3
30 days days days days 1-3 years years Total
-------- -------- -------- ------- --------- ------- --------
(in millions of constant Ch$ of December 31, 2002, except for percentages)
Foreign Currency........ (232.70%) (115.98%) (71.14%) (31.28%) 16.14% 37.39%
-------- -------- -------- ------ ------ ------
Total................. (97.60%) (54.41%) (47.71%) (35.78%) (8.28%) 12.65%
======== ======== ======== ====== ====== ======
- ----------------------
(1) Includes loans (other than contingent loans) and investments.
(2) Includes deposits, Central Bank borrowings, repurchase agreements, mortgage
finance bonds and other interest bearing deposits (other than contingent
liabilities).
Variations in interest rate sensitivity may exist within the repricing
periods presented due to differing repricing dates within the period. Variations
may also arise among the different currencies in which interest rate positions
are held. As the above table reflects, our exposure to potential changes in
Chilean peso interest rates is increased by the fact that at December 31, 2002,
approximately 32% of our Chilean peso-denominated interest bearing liabilities
and 14% of our Chilean peso-denominated interest earning assets have a repricing
period of less than one month. Approximately 23% of our UF-denominated interest
bearing liabilities and 23% of our UF-denominated interest earning assets have a
repricing period of less than three months, which is also the most common
repricing period for UF-denominated time deposits. In the case of interest
earning assets and interest bearing liabilities denominated in UF, our exposure
to changes in interest rates is reduced by the fact that a significant portion
of the interest rate earned or paid on such assets or liabilities is currently
indexed to reflect the daily effect of inflation, and as a result, our exposure
is limited to variations in the real interest rate among such assets and
liabilities. Further, a substantial part of our foreign currency-denominated
loans are funded by foreign currency borrowings and time deposits with
comparable maturity or repricing dates. Moreover, mortgage loans which have five
to 30 year terms, are financed through Mortgage Finance Bonds issued for the
same terms and in the same currency.
The table below provides information on principal cash flows, based on the
maturity or repricing period, the earlier and fair values as of December 31,
2002.
87
Weighted Weighted Weighted Weighted
2003 Interest 2004 Interest 2005 Interest 2006 Interest
Amount Rate Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------ -------- ------ --------
(in millions of constant Ch$ of December 31, 2000)
Assets
Commercial loans
$............... 217,147 6.04 11,925 12.75 3,214 20.32 4,641 10.72
UF.............. 240,125 3.37 34,971 5.93 34,068 6.79 29,660 5.09
Foreign Currency 53,163 2.78 8,001 3.42 19,866 2.74 34,851 3.01
Consumer loans
$............... 55,967 21.22 40,432 18.95 33,687 18.87 25,412 19.37
UF.............. 3,997 8.25 3,464 7.38 3,115 7.91 2,723 8.26
Foreign Currency 184 0.00 0 0 0 0 0 0
Mortgage loans
$............... 0 0 0 0 0 0 0 0
UF.............. 24,038 9.08 21,899 9.14 21,064 9.09 19,995 9.10
Foreign Currency 0 0 0 0 0 0 0 0
Foreign Trade
loans
$............... 11,941 4.11 0 0 0 0 0 0
UF.............. 3,523 1.13 0 0.00 149 5.43 0 0.00
Foreign Currency 167,052 2.61 3,636 6.93 2,125 3.94 4,577 3.38
Interbank loans
$...............
UF..............
Foreign Currency
Lease contracts
$............... 39 16.61 31 12.54 33 9.51 15 9.51
UF.............. 16,302 9.84 13,215 9.45 10,139 8.95 9,866 8.32
Foreign Currency 2,133 6.40 1,716 5.07 1,591 4.74 2,037 4.74
Other outstanding
loans
$............... 45,542 1.04 2,651 1.05 6,115 1.05 2 0.00
UF.............. 11,531 6.01 10,418 6.30 10,352 6.29 9,969 6.31
Foreign Currency 31 0.00 0 0.00 0 0.00 0 0.00
Total interest
earning assets
$............... 330,636 7.85 55,039 16.74 43,049 16.44 30,070 18.03
UF.............. 299,516 4.32 83,967 7.43 78,887 7.66 72,213 6.93
Foreign Currency 222,563 2.68 13,353 4.59 23,582 2.99 41,465 3.14
Liabilities
Time Deposits
$............... 692,917 3.26 51,535 4.74 1,296 5.63 1,022 7.20
UF.............. 500,199 1.75 12,707 2.70 3,520 4.74 1,010 5.04
Foreign Currency 121,715 1.61 0 0.00 0 0.00 0 0.00
Savings accounts
$...............
UF.............. 57,648 0.60
Foreign Currency
Central Bank
Borrowings
$............... 0 0 0 0
UF.............. 3,560 3.00 0 0 5,281 6.00
Foreign Currency 0 0 0 0
Securities
subject to
agreements to
repurchase
$............... 82,851 2.96 0 0 0
UF..............
Foreign Currency 172,714 1.34 0 0 0
Mortgage finance
bonds
$...............
UF.............. 28,504 6.55 23,646 6.57 22,555 6.46 21,412 6.40
Foreign Currency
Subordinated bonds
$...............
UF.............. 9,119 8.06 688 6.50 733 6.50 780 6.50
Foreign Currency
Other bonds
$...............
UF.............. 5,059 5.65 3,226 5.99 2,032 6.00 2,574 6.00
Foreign Currency
Borrowings from
domestic
financials
$............... 19,214 4.32
UF.............. 35,680 1.80 66 7.00 60 4.00 0
Foreign Currency 13,914 1.90 0 0 0
Foreign borrowings
$...............
UF..............
Foreign Currency 170,471 1.94 4,275 1.85 299 7.21 0
Other obligations
$............... 1,573
UF.............. 494 5.12 126 4.55 130 4.58 65 4.66
Foreign Currency 29,060 0.01 351 7.22 260 7.10 66 7.20
Total interest
earning
Liabilities
$............... 796,555 3.25 51,535 4.74 1,296 5.63 1,022 7.20
UF.............. 640,263 1.99 40,459 5.30 29,030 6.20 31,122 6.25
Foreign Currency 507,874 1.55 4,626 2.26 559 7.16 66 7.20
89
Weighted Weighted
2007 Interest 2008 Interest
Amount Rate Amount Rate TOTAL Fair Value
------ -------- ------ -------- ----- ----------
(in millions of constant Ch$ of December 31, 2000)
Assets
Commercial loans
$............... 5,798 7.20 10,818 6.75 253,543 248,296
UF.............. 25,194 6.08 45,346 6.82 409,364 419,042
Foreign Currency 48,031 3.06 1,703 4.86 165,615 163,854
Consumer loans
$............... 16,350 19.56 12,293 19.94 184,141 183,497
UF.............. 2,361 8.14 4,604 8.41 20,264 22,056
Foreign Currency 0 0 0 0 184 184
Mortgage loans
$............... 0 0 0 0 0 0
UF.............. 19,055 9.13 147,438 9.16 253,489 293,843
Foreign Currency 0 0 0 0 0 0
Foreign Trade
loans
$............... 0 0 0 0 11,941 24,777
UF.............. 0 0.00 0 0.00 3,672 3,672
Foreign Currency 19,794 3.54 20,724 2.85 217,908 205,072
Interbank loans
$...............
UF..............
Foreign Currency
Lease contracts
$............... 0 0.00 0 0.00 118 117
UF.............. 8,638 7.20 12,101 9.05 70,261 70,551
Foreign Currency 1,419 3.04 4,456 3.04 13,352 13,353
Other outstanding
loans
$............... 2 0.00 97 0.00 54,409 54,409
UF.............. 10,354 6.37 261,626 6.34 314,250 331,889
Foreign Currency 0 0.00 0 0.00 31 31
Total interest
earning assets
$............... 22,150 16.32 23,208 13.71 504,152 511,097
UF.............. 65,602 7.23 471,115 7.36 1,071,300 1,141,053
Foreign Currency 69,244 3.20 26,883 3.01 397,090 382,494
Liabilities
Time Deposits
$............... 5,777 8.68 0 0.00 752,547 749,206
UF.............. 4,580 7.02 758 6.70 522,774 522,975
Foreign Currency 0 0.00 0 0.00 121,715 121,715
Savings accounts
$...............
UF.............. 57,648 57,648
Foreign Currency
Central Bank
Borrowings
$............... 0 0 0
UF.............. 0 0 8,841 9,042
Foreign Currency 0 0 0
Securities
subject to
agreements to
repurchase
$............... 0 0 82,851 82,851
UF..............
Foreign Currency 0 0 172,714 172,714
Mortgage finance
bonds
$............... 0
UF.............. 20,320 6.40 134,562 8.37 250,999 285,930
Foreign Currency 0
Subordinated bonds
$............... 0
UF.............. 831 6.50 19,456 6.88 31,607 41,627
Foreign Currency 0
Other bonds
$............... 0
UF.............. 2,728 6.00 24,106 6.00 39,725 49,422
Foreign Currency 0
Borrowings from
domestic
financials
$............... 19,214 19,214
UF.............. 0 0 35,806 35,806
Foreign Currency 0 0 13,914 13,914
Foreign borrowings
$............... 0
UF.............. 0
Foreign Currency 0 0 175,045 175,045
Other obligations
$............... 1,573 1,573
UF.............. 886 5.54 4,943 5.49 6,644 6,640
Foreign Currency 26 7.40 0 0.00 29,763 29,763
Total interest
earning
Liabilities
$............... 5,777 8.68 0 0.00 856,185 852,844
UF.............. 29,345 6.44 183,825 7.82 954,044 1,009,090
Foreign Currency 26 7.40 0 0.00 513,151 513,151
90
Market Price Risk on Bonds Portfolio
Our investment policy is oriented principally to low risk instruments with
high liquidity. Over 81% of our portfolio consists of instruments from the
Central Bank and mortgage finance bonds issued by us. See "--Mortgage Finance
Bonds Issued and Held by Us". All investments are made in accordance with the
limits for both the instruments and for the specific issuer set by our Board of
Directors. The investment portfolio is valued on a daily basis to keep price
risk under control, and on a monthly basis to comply with the Superintendence's
requirements and to keep the instruments marked-to-market. See "Business
Overview--Chilean Regulation and Supervision". The potential loss to us over one
year that would have resulted from a hypothetical, instantaneous and unfavorable
change of 100 basis points in the interest rate applicable to our bonds
portfolio on December 31, 2002 would be approximately Ch$9,267 million. See
"--Asset and Liability Management" and "Business Overview--Chilean Regulation
and Supervision--Foreign Exchange".
Capital Expenditures
Capital expenditures in each of the years ended December 31, 2000, 2001 and
2002 totaled Ch$9,075 million, Ch$10,198 million and Ch$9,361 million,
respectively. Capital expenditures consist mainly of investments to upgrade our
communications and computer systems, improve existing branches and open new
branches. Such capital expenditures were funded with resources generated through
our operations. Our capital expenditures during 2003 will be used to further
improve our communications and computer systems and to develop additional
infrastructure.
Capital
According to the current General Banking Law, banks should have a minimum
ratio of Total Capital to Risk Adjusted Assets of 8%, net of required allowances
for loans losses, and a minimum ratio of Basic Capital to Total Assets of 3%,
net of required allowances for loan losses. For these purposes, Total Capital
means the aggregate of: (a) a bank's paid-in capital and reserves, excluding
capital attributed to subsidiaries and foreign branches, (b) its subordinated
bonds, calculated at the issue price but not exceeding 50% of its Basic Capital,
and (c) its voluntary allowances for loan losses, up to 1.25% of the Risk
Adjusted Assets. Basic Capital includes paid-in capital and reserves, but
excludes the net income for the period. Risk Adjusted Assets are based on total
assets on an unconsolidated basis, which are then classified into five
categories, each of which has a different weight.
At December 31, 2002, in accordance with the requirements of the General
Banking Law, our ratio of Total Capital to Risk Adjusted Assets was 12.31% or
Ch$89,408 million higher than the 8% minimum required by the first test under
the Banking Law. Our ratio of Basic Capital to Total Assets was 7.38% or
Ch$140,564 million higher than the 3% minimum Basic Capital required by the
second test under the General Banking Law.
Our mutual fund and securities brokerage subsidiaries are also subject to
minimum capital requirements as defined under Chilean regulations. All such
minimum regulatory capital requirements were being complied with at December 31,
2000, 2001 and 2002.
C. Research and Development, Patent and License
We do not currently conduct any significant research and development
activities.
D. Trend Information
Competition
The Chilean financial system is comprised of 26 private-sector banks (of
which 16 are banks established in Chile and 9 are subsidiaries of banks
established abroad), and one public-sector bank (BancoEstado). At December 31,
2002, the Chilean financial system had a total of Ch$31,644,779 million
(US$44,463 million) of loans outstanding. In the last five years, the average
annual rate of increase in outstanding loans for the Chilean financial
91
system was 3.6% (compared with an average annual rate of increase in GDP of 2.1%
during the same period) and the average annual return on average shareholders'
equity was 13.1%.
Foreign-owned banks have been operating in Chile since the 1930s. More than
half of all Chilean banks are foreign-owned (considering those established in
Chile and those classified as subsidiaries of foreign banks), including us. Such
banks accounted for 42.5% of total loans made by the Chilean financial system at
December 31, 2002.
The Chilean market for financial services is highly competitive. We compete
with other Chilean private banks, and with Banco del Estado de Chile
("BancoEstado") that makes consumer credit available to an important portion of
the Chilean population. The middle and lower-middle income segments of the
Chilean population and the small and medium-size companies have become the
target of several banks and competition in those segments is likely to increase.
Because Chilean regulations do not impose barriers to entry into the
Chilean market and do not restrict capital movements, we face significant
competition from both domestic and foreign commercial and investment banks. See
"Chilean Regulation and Supervision". The regulatory framework in the Chilean
financial system has led to increased consolidation both in the universal bank
sector and in the sectors of financial institutions specializing in specific
products or markets. Concentration, as measured by the participation of the 10
major banks in total deposits, increased from 72.4% at December 31, 1998 to
76.0% at December 31, 2002.
Consolidation in the Chilean market has given the opportunity to other
competitors to increase their branch network and gain proximity to compete for
banking penetration. Traditional competitors with international name recognition
and easy access to financial and technical resources made the market more
competitive, thereby constraining our growth strategy.
Limited barriers to entry and continued consolidation of the Chilean
banking industry have intensified price competition. We expect the trends of
increased competition and consolidation to continue, and result in the formation
of new large financial groups.
Regulations
As a result of the amended General Banking Law, Chilean banks are now
allowed to establish, in addition to branches and representative offices outside
Chile, foreign subsidiaries (or have minority interests in foreign entities)
engaged in banking activities or in any of the types of non-banking activities
in which Chilean banks can engage through domestic subsidiaries. It also permits
Chilean-based banking offices, under certain conditions, to make loans to many
types of entities located in other countries. Following such amendment, in
September 1998 we acquired a controlling stake at an insurance brokerage firm
and in 1999 we integrated our leasing subsidiary into the Bank.
Besides the activities linked to the subsidiaries, our operations profile
was expanded by permitting the execution of underwriting agreements for public
placement of stocks and the possibility of development for financial services
for third parties.
Regulators have stated that the above actions are part of a trend of
modernization that leads to an increasing internationalization of the
regulations. We expect such trends to continue, opening new windows of activity
for our business and increasing supervision. We believe such trend and the
globalization of the banking business will result in strategic alliances with
non-banking businesses and the formation of new and larger financial groups.
E. Off-Balance Sheet Arrangement
We do not have any off-balance sheet financings. We have no majority-owned
subsidiaries that are not included in our consolidated financial statements, nor
do we have any interests in or relationships with any special purpose entities
that are not reflected in our consolidated financial statements.
92
F. Tabular Disclosure of Contractual Obligations
The following table represents our contractual obligations and commercial
commitments as of December 31, 2002:
xxxxx
Payments due by Period
in millions of Ch$
Less than 1-3 4-5 After 5
Total 1 year years years years
Contractual obligations
Long-term debt............................. -- -- -- -- --
Capital lease obligations.................. -- -- -- -- --
Operating leases........................... -- -- -- -- --
Unconditional purchase obligations......... -- -- -- -- --
Other long-term obligations................ 1,335.7 1,335.7 -- -- --
------- ------- ------ ----- -----
Total contractual cash obligations......... 1,335.7 1,335.7 -- -- --
======= ======= ====== ===== =====
Commercial Commitments
Lines of credit............................ 42,838 28,474 4,435 2,149 7,780
Standby letters of credit.................. 196,669 192,095 4,574 -- --
Guarantees (contingent liabilities)........ 85,457 72,101 12,245 1,101 10
Standby repurchase obligations............. 255,565 255,565
Total commercial commitments............... 580,529 548,235 21,254 3,250 7,790
======= ======= ====== ===== =====
Our only contractual obligation of any relevance stems from a contract
signed with the BBVA Group by which we received technical advice from 1998 to
2002. The contract expired on December 31, 2002, and the only annual payment
remains is the Ch$1,337.5 million set forth above on the table. See Note 16 to
the Consolidated Financial Statements for information on previous payments.
Other contingencies and commitments with no specific maturity, as well as
commitments or responsibilities arising in the ordinary course of business are
discussed in Note 15 to the Consolidated Financial Statements.
See Note 12 to the Consolidated Financial Statements for more information
on our most relevant commercial commitments.
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
Our administration is conducted by a Board of Directors which, in
accordance with our By-laws, consists of nine directors who are elected at
annual ordinary shareholders' meetings. The entire Board is elected every three
years; the current Board was elected at an Ordinary Shareholder's Meeting on
March 17, 2003. Cumulative voting is permitted for the election of directors.
The Board may appoint replacements to fill any vacancies that occur during
periods between elections. Our executive officers are appointed by the Board of
Directors and hold office at its discretion. Scheduled meetings of the Board of
Directors are held once a month. Extraordinary Board meetings are called when
summoned by the Chairman or when requested by at least five directors.
93
Our current directors and executive officers are as follows:
Directors Position
--------- --------
Jose Said Saffie (1) ............................ Director and Chairman
Vitalino Nafria Aznar ........................... Director and Vice Chairman
Gustavo Alcalde Lemarie ......................... Director
Ernesto Bertelsen Repetto ....................... Director
Manuel Gonzalez Cid ............................. Director
Ricardo Massu Massu ............................. Director
Antonio Martinez Jorquera ....................... Director
Jaime Said Handal (1) ........................... Director
Jose Fonollosa Garcia ........................... Director
Alternate Directors Position
------------------- --------
Carlos Area Usatorre ............................ Alternate Director
Jose Domingo Eluchans U. ........................ Alternate Director
- ----------------------
(1) Mr. Jose Said S. is the uncle of Mr. Jaime Said H.
Executive Officers Position
------------------ --------
Ramon Monell Valls................................... General Manager
Maria Elisa Abovic W. ............................... Manager-Legal Division
Enrique Hosiasson.................................... Manager-Business Banking Division (1)
Juan Escudero ....................................... Manager-Commercial and Personal Banking Division
Manuel Olivares...................................... Manager-Corporate Banking Division (2)
Jaime Uribe ......................................... Manager-Treasury and Fund Management Division
Jose Joaquin Murguialday............................. Manager-Credit Risk Division
Jose Maria Jimenez................................... Manager-Organization and Systems Division (3)
Marcos Balmaceda..................................... Manager-Human Resources Division
Salvador Milan....................................... Manager- Planning and Financial Control Division (4)
Jorge Cruz D. ....................................... Manager-Comptrolling Division
- ----------------------
(1) The Business Banking Division was created in 2002.
(2) The Corporate Banking Division was restructured and re-launched as a
separate division during 2000.
(3) The Administration Division was absorbed by the Organization and Systems
Division, effective May 2003.
(4) The EFYCO Division was merged into the Planning and Financial Control
Division, effective December 2001.
Subsidiaries
- ------------
Frank Leighton C. ..................................General Manager-BHIF Brokerage
Alejandro Bertrand..................................General Manager-BHIF Advisory
Roberto Molina......................................General Manager-BHIF Residential Housing Fund Manager
Eduardo Boizard ....................................General Manager-BHIF Residential Leasing
Fernando Santana....................................General Manager-BHIF Closed-End Fund Manager
Ian Couso...........................................General Manager-BHIF Mutual Fund Manager
Raul Ossandon G. ...................................General Manager-BHIF Insurance Brokerage
Set forth below are brief biographical descriptions of the directors and
executive officers of BBVA Banco BHIF, all of whom reside in Chile.
94
Directors
Jose Said S. has served as Chairman of our Board of Directors since 1994.
He also currently serves as Chairman of Parque Arauco and Envases Multipack and
as Vice-Chairman of Vital S.A. In addition, he serves as Director of
Embotelladora Andina and Envases del Pacifico. Mr. Said studied law at the
Universidad de Chile.
Vitalino Nafria A. currently serves as our Vice-Chairman. Mr. Nafria has
been a Director of BBVA Chile since 2002. He currently holds the position of
Director General for America at the BBVA Group. Prior to that, he was CEO at
BBVA Bancomer, a leading mexican bank belonging to the BBVA Group. Mr. Nafria
joined the BBVA Group in 1966.
Ernesto Bertelsen R. has been a Director of BBVA Chile since 1987. He also
serves as Chairman of the Boards of Directors of BHIF Asesorias y Servicios
Financieros S.A. and BHIF Leasing. Mr. Bertelsen holds a degree in Finance and
Administration from the Universidad Adolfo Ibanez, Valparaiso, Chile.
Jose Fonollosa G. has been a Director of BBVA Chile since 2001. He
currently holds the position of Director General of Retail Banking for America
at the BBVA Group. Prior to that, he was Director for Europe and International
Operations and before that he was the CFO for the BBVA Group. Mr. Fonollosa
joined the BBVA Group in 1976.
Antonio Martinez-Jorquera L. has been a Director of BBVA Chile since 2001.
He currently holds the position of Director General of Corporate Banking for
America at the BBVA Group. Prior to that, he was the CEO at BBVA Banco Frances,
a leading bank in Argentina. Mr. Martinez-Jorquera joined the BBVA Group in
1969.
Ricardo A. Massu M. has been a Director of BBVA Chile since 1987, prior to
which time he lived in England and held positions at Bank of America
Corporation, Bank of America International Ltd. and Banco de Chile. Mr. Massu
received a Bachelors of Science and a Master in Business Administration from
Babson College in Wellesley, Massachusetts.
Manuel Gonzalez C. has been a Director of BBVA Chile since 2001. He is
Director General Adjunto for the BBVA Group. Mr. Gonzalez holds a degree from
the Universidad Complutense de Madrid and a M.Sc. in Finance from the University
of Chicago.
Gustavo Alcalde L. has been a Director of BBVA Chile since 2002. Since 2001
he is a member of the Senior Management Committee at the BBVA Group, and a board
member at BBVA Insurance. He is the CEO at AFP Provida since 1996. Mr. Alcalde
holds a degree in Finance and Administration from the Universidad de Chile.
Jaime Said H. has been a Director of BBVA Chile since 1987. Previously, he
served as the Vice-President and Chilean representative of the Republic Bank of
Dallas, USA. He received a degree from the Universidad Adolfo Ibanez,
Valparaiso, Chile and received a degree in Business Administration from Southern
Methodist University in Dallas, Texas.
Alternate Directors
Carlos Area has been an Alternate Director of BBVA Chile since 1998, prior
to which time he was the representative for the BBVA Group in Chile.
Jose Domingo Eluchans U. served as Director of BBVA Chile since 1987 to
1998, and from that date as Alternate Director. Since 1976, he has practiced law
at the offices of Edmundo Eluchans y Cia. He received his law degree from the
Escuela de Derecho de la Universidad Catolica de Chile in 1976.
Executive Officers
Ramon Monell V. became the General Manager of BBVA Chile on January 25,
2002. Prior to his appointment, Ramon Monell was an Assistant Director General
for BBVA, responsible for the Marketing and Development of Wholesale Business
and has a distinguished track record within the BBVA Group.
95
Maria Elisa Abovic W. has been the Manager of our Legal Division since
March 1997. Ms. Abovic has been employed by us since 1977 and held the position
of Assistant General Counsel from 1992 until she accepted her current position
as Manager. She previously held the position of attorney to the Regional
Planning Secretariat of the Fifth Region and was a member of the Private Law
Faculty of the Universidad Catolica de Valparaiso. Ms. Abovic received her law
degree from the Universidad Catolica de Valparaiso.
Juan Escudero G. holds the position of Commercial and Personal Banking
Manager at BBVA Chile since April 2000. Prior to joining us, he was in charge of
Business Development at the Chile - Brazil region for BBVA. Mr. Escudero holds a
degree in Law.
Enrique Hosiasson S.. holds the position of Business Banking Manager at
BBVA Chile since April 2002. Previously he held the position of Regional Branch
Manager. Mr. Hosiasson holds a degree in Commercial Engineering from Universidad
Catolica de Chile.
Manuel Olivares R. holds the position of Corporate Banking Manager at BBVA
Chile since May, 2000. Previously he held senior credit officer positions at
Citibank (Chile). He holds a degree in Economics and Business Administration
from the Universidad de Chile.
Jaime Uribe currently holds the position of Division Manager for Treasury
and Fund Management at BBVA Chile since December 2001. He was previously
Treasury Manager at Banco Santander-Chile. Mr. Uribe holds a degree in
Engineering from the Universidad de Chile. He has a vast experience in the
finance areas of banks and subsidiaries in Chile.
Jose Joaquin Murguialday M. has been Credit Risk Manager of BBVA Chile
since October. Previously he held the positions of Corporate Banking Manager and
of Deputy Credit Risk Manager at the central offices of BBVA at Bilbao. Mr.
Murguialday holds a degree in Economics.
Jose Maria Jimenez T. has been Operations and Technology Manager of BBVA
Chile since August 2002. Prior to his current position, he was Director of the
America Organization at the BBVA Group, and before that he held senior
managerial positions at Argentaria. Mr. Jimenez obtained a degree in Economic
and managerial Sciences at the Universidad de Sevilla. He holds a master degree
from CEREM and an MBA from IESE.
Marcos Balmaceda M. has been Manager of Human Resources of BBVA Chile since
July, 2001. He received a degree in Agroindustrial Engineering and has also an
MBA from Universidad Adolfo Ibanez. Mr. Balmaceda has a vast experience at
multinational corporations.
Salvador Milan A. has been the Planning and Development Manager since
August 2002. Previously he held a similar position at AFP Provida, and a
position as Executive Vice-President and Finance and Logistics Director at BBV
Puerto Rico. Mr. Milan holds a degree in Economics and Managerial Sciences from
Universidad Central de Barcelona and followed graduate studies at CEPADE -
Universidad Politecnica de Madrid.
Jorge Cruz D. joined BBVA Chile in 1977. He serves as BBVA Chile's
Controller since April 23 2003. He previously held the position of Manager of
Administration since 1994 and, before that, the positions of Assistant Manager
of the Mortgage Loans Division, Assistant Manager of Operations and General
Accounting Manager, among others. Mr. Cruz was previously employed by the
Contraloria General of the Republic of Chile and Abaco S.A. He holds a degree in
Accounting.
Subsidiaries
Frank Leighton C. has been the General Manager of BBVA BHIF Corredores de
Bolsa S.A. since February 1998. Previously, he was the General Manager of
Bancredito S.A. Corredor de Bolsa. He received a degree in Business
Administration from the Universidad Diego Portales.
96
Alejandro Bertrand has been the General Manager of BHIF Asesorias y
Servicios Financieros S.A. (our investment banking team) since February 2001.
Mr. Bertrand holds an MBA from the Wharton School of the University of
Pennsylvania and an Engineering degree from Pontificia Universidad Catolica de
Chile.
Roberto Molina has been the General Manager of BHIF Residential Housing
Fund since January, 2001. Previously, he was the Finance Manager at Banco
Exterior - Chile. He holds a degree in Finance from Pontificia Universidad
Catolica de Chile and is presently at a graduate program in Finance at ESANE
Santiago, Chile.
Eduardo Boizard P. has been the General Manager of BBVA BHIF Residential
Leasing since its 2001. Previously, he was Branch Manager of our Corporate
Office. He holds a degree in Civil Engineering from the Universidad Catolica de
Chile.
Fernando Santana has been the General Manager of BHIF Closed-end Fund
Manager since 1999. Previously, he was in charge of Investment Analysis at BHIF
Closed-end Fund Manager. He holds an Industrial Engineering degree from the
Universidad Catolica de Chile.
Ian Couso W. has been the General Manager of BBVA BHIF Mutual Fund since
March 2002. Previously, he was the Commercial Manager at Larrain Vial, a well
known brokerage house. He is an Industrial Civil Engineer from Universidad de
Chile. He also holds an MBA from Universidad Adolfo Ibanez.
Raul Ossandon G. has been the General Manager of BBVA BHIF Corredora
Tecnica de Seguros (BHIF CTS) since 1993. Previously, he was Development Manager
at BHIF CTS. He received a degree in Business Administration in the Valparaiso
Business School, belonging to Universidad Federico Santa Maria, (presently
Universidad Adolfo Ibanez) in 1982.
B. Compensation
Compensation of Directors and Officers
For the year ended December 31, 2002, the aggregate amount of compensation
paid by us and our subsidiaries to all directors and executive officers was
Ch$1,496 million (US$2.1 million). Our policy is not to disclose to our
shareholders or otherwise make publicly available information relating to the
compensation of our individual directors and officers. Such disclosure is not
required under Chilean regulations.
No money was set aside or accrued by us to provide pension, retirement or
similar benefits for any of our directors or executive officers.
C. Board Practices
Our administration is conducted by our Board of Directors which, in
accordance with our By-laws, consists of nine directors who are elected at
annual ordinary shareholders' meetings. The entire Board is elected every three
years; the current Board was elected at an Ordinary Shareholder's Meeting on
March 17, 2003. Cumulative voting is permitted for the election of directors.
The Board may appoint replacements to fill any vacancies that occur during
periods between elections. Our executive officers are appointed by the Board of
Directors and hold office at its discretion. Scheduled meetings of the Board of
Directors are held once a month. Extraordinary Board meetings are called when
summoned by the Chairman or when requested by at least five directors.
Directors Committee
Law 19,705, published on December 20, 2000, established, among other
changes to corporate regulations, the need to create a Directors Committee in
order to reinforce self regulation strengthening the controls on the management
activities. This Committee has three members which are appointed by the Board of
Directors and holds office on January and July. It can also convene
extraordinary meetings any time as they see fit. On the March 17,
97
2003 Board meeting the Board appointed Mr. Manuel Gonzalez Cid, Mr. Vitalino
Nafria Aznar and Mr. Jose Said Saffie.
The Directors Committee has the following duties:
i) To examine the reports form the external auditors and, as required,
balances and statements of income presented by the management to the
shareholders, and to issue a verdict about them before they are
brought to the shareholders for their approval.
ii) To present to the Board a proposal on the external auditors and the
rating firms to be retained for the annual period, before the Board
makes the forma proposal to the Annual Shareholders' Meeting
iii) To review the salaries and compensation plans for the senior
management.
iv) To examine all operations described in articles 44 and 89 of the
Corporate Law, and to issue a verdict about them. A copy of such
verdict shall be sent to the President of the Board, who will read it
at the Board meeting in which the operation is to be approved.
Audit Committee
Our Audit Committee was established on October 23, 1995, as described in
the Minutes of the board of directors dated October 23, 1995, on a
recommendation issued by the Superintendent of Banks on a note dated October 11,
1995. This committee meets quarterly in March, June, September and December of
each year. As of this date, the committee is composed of one director, Mr.
Ernesto Bertelsen R.; the CEO, Mr. Ramon Monell Valls; the Controller, Mr. Jorge
Cruz D.; and the General Counsel, Ms. Maria Elisa Abovic Wiegand. If needed, the
Committe can request the additional participation of the external auditors. As
of December 31, 2002 , the Audit Committee members were Mr Bertelsen, Mr.
Monell, Ms. Abovic and Mr. Daniel Planas Jane. Mr. Planas was promoted to a
position in another bank of the Group, and was replaced by Mr. Cruz on April 23,
2003.
The Audit Committee presently has specific functions, approved by the Board
of Directors, as well as procedures that enable it to comply with its mission.
Its functions currently are:
o To supervise the sufficiency, adequacy and efficient functioning of
internal control systems in such a manner that ensures the
correctness, reliability, sufficiency and clarity of (i) our financial
statements as contained in the annual and quarterly reports, and (ii)
the accounting or financial information which may be required by the
Superintendency or other regulatory bodies, including those pertaining
to countries where we carry out activities;
o To monitor our compliance with applicable domestic or international
regulations in matters relating to money laundering, conduct in the
securities markets, data protection, and competition, as well as to
ensure that requests for information or action made by official bodies
holding competency in these areas are fulfilled in time and form;
The board member that integrates the Committee reports each month to the
Board.
On May 6, 2003, the Superintendency issued new regulations that make the
Audit Committee an obligatory and essential part of the internal control systems
in all Chilean financial institutions. Under the new regulations, this committee
will be vested with the powers and resources necessary for the exercise of its
fundamental function within the corporation. In accordance with the regulations
and with our principles of corporate governance, it will be formed exclusively
by independent directors, with the dedication, capacity and experience necessary
for carrying out this duty. This committee shall have specific rules, approved
by the Board of Directors, which determine its functions, and establish the
procedures to enable it to comply with its mission. Among its functions will be:
o To supervise the sufficiency, adequacy and efficient functioning of
internal control systems in such a manner that ensures the
correctness, reliability, sufficiency and clarity of (i) our financial
statements as
98
contained in the annual and quarterly reports, and (ii) the accounting
or financial information which may be required by the Superintendency
or other regulatory bodies, including those pertaining to countries
where we carry out activities;
o To monitor our compliance with applicable domestic or international
regulations relating to money laundering, conduct in the securities
markets, data protection, and competition, as well as to ensure that
requests for information or action made by official bodies holding
competency in these areas are fulfilled in time and form;
o To ensure that the code of ethics and code of conduct applicable to
our personnel meet regulatory requirements and are adequate; and
o To monitor compliance of directors with the provisions contained in
the Directors' Code, as well as with regulations applicable to conduct
in the securities markets.
The committee shall be able to outsource the contracting of advisory
services in material matters when it is considered that, due to reasons of
specialization or independence, these cannot be rendered by our experts or
technical staff. This new regulation will be effective no later than the year
2004, and is presently in the process of being implemented at our bank.
Compensation Committee
Currently we do not have a compensation committee.
D. Employees
At December 31, 2002, we had 1,770 employees, approximately 42% of whom
belonged to one union, the Sindicato Unificado de Trabajadores Banco BHIF. All
management positions are held by non-union employees. We are party to one
collective bargaining agreement which covers all of our unionized employees and
which was renewed in April 2001 for 36 additional months, commencing in May
2001. We have only experienced a one-week strike since the union's formation in
1983 and consider relations with our employees to be good. Of our 1,770
employees, 65 were employed by our subsidiaries at December 31, 2002.
E. Share Ownership
As of May 31, 2003 the members of our Board of Directors owned an aggregate
of 335,630,414 shares of BBVA Chile as shown in the table below.
Directly % of
Owned Indirectly Capital
Name Shares Owned Shares Total Shares Stock
---- ------ ------------ ------------ -----
Chairman
Jose Said ...................... 971 56,223,313 56,224,284 15.57%
Vice Chairman:
Vitalino Nafria (1) ............ 0 237,067,355 237,067,355 65.63%
Directors:
Gustavo Alcalde (1) ............ 0 0 0 0.00%
Manuel Gonzalez (1) ............ 0 0 0 0.00%
Jose Fonollosa (1) ............. 0 0 0 0.00%
Antonio Martinez (1) ........... 0 0 0 0.00%
Ernesto Bertelsen (2) .......... 0 0 0 0.00%
Jaime Said (2) ................. 0 23,834,108 23,834,108 6.60%
Ricardo Massu (2) .............. 0 18,504,667 18,504,667 5.12%
-------------------------------- --- ----------- ----------- -----
Total ............................. 971 335,629,443 335,630,414 92.92%
=== =========== =========== =====
- ----------------------
(1) These Directors have been designed by and act in representation of BBVA
(2) These Directors have been designed by and act in representation of the local
shareholders who signed the Shareholders Agreement with BBVA.
99
As of May 31, 2003, the executive officers and their families owned less
than 1,000,000 shares. None of our senior executives holds 1% or more of our
shares.
See Item 7 for other share ownership information.
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
Principal Shareholders
We are controlled by BBVA. As of December 31, 2002, BBVA controlled 65.63%
of our outstanding shares ("the Shares"). Our former principal shareholders, the
Said Group, the Massu Group, the Sumar Group and Fundacion (the "Former
Principal Shareholders"), held 27.29% of our outstanding shares as of December
31, 2002 with the balance of the outstanding shares being held by the public.
Our principal shareholders do not have different voting rights from the public.
BBVA, a banking corporation organized in Spain, of which no natural or
legal person owns more than 2%, obtained control of BBVA Chile through: (i) the
acquisition of 40,637,415 shares of Banco BHIF for an aggregate price of
Ch$20,821,157,368 and (ii) the subscription, on September 24, 1998, of
158,034,393 newly-issued shares of Banco BHIF that were issued in accordance
with the shareholders' resolution passed at the Extraordinary Shareholders'
Meeting held on August 21, 1998. Ch$69,301,321,035 of the total purchase price
of Ch$126,002,401,882 was paid by BBVA in cash, and the balance of
Ch$56,701,080,847 was paid within two years from the date of the subscription.
BBVA undertook the above-referenced transactions in accordance with a
subscription and share purchase agreement which had been entered into by BBVA
and the Former Principal Shareholders on June 18, 1998. In addition, pursuant to
such agreement, BBVA and the Former Principal Shareholders entered into a
separate agreement which governs our future administration. The Former Principal
Shareholders also entered into an agreement among themselves with respect to our
future administration.
In late 1999, BBVA acquired from the Massu Group a Chilean investment firm,
Aragon Holdings, which owns 6.92% of our outstanding shares. With this
acquisition, BBVA gained control of 62.4% of our outstanding shares.
Since 1996, we have only Common Shares, all of which have equal voting
rights. Each of the ADS represent 10 Common Shares and each has the voting power
of the corresponding 10 shares.
The Said Group
The Said Group controlled 22.16% of our outstanding Shares as of December
31, 2002. The Said Group plays a major role in certain industrial and commercial
sectors in Chile, controlling Embotelladora Andina (Coca-Cola bottling company
in Santiago) and Parque Arauco (one of Chile's largest shopping centers), among
other entities. In addition, the Said Group is a controlling shareholder in Rio
de Janeiro Refrescos (Coca-Cola bottler in Brazil). The Said Group is jointly
controlled by Mr. Jose Said S., who is the Chairman of our Board of Directors,
and Mr. Jaime Said D, who is also a member of our Board of Directors.
The Massu Group
The Massu Group controlled 5.12% of our outstanding Shares as of December
31, 2002. In addition to BBVA Chile, the Massu Group holds significant interests
in Banco Boliviano Americano, Bifactoring, BHIF America Life
100
Insurance Co. and certain real estate businesses. Mr. Ricardo Massu, the
head of the Group, is a member of our Board of Directors.
The Sumar Group
The Sumar Group controlled 3.00% of our outstanding Shares as of December
31, 2002. In addition to its significant minority interest in BBVA Chile, the
Sumar Group is primarily engaged in the textile industry through Manufacturas
Sumar, one of the largest textile companies in Chile.
The following table shows the percentage of shares owned by the Principal
Shareholders, as of May 31, 2003.
Common Shares
Owner(1) (Thousands) Voting Power
- ------------------------------------------------------------------------ ----------- ------------
BBVA.................................................................. 237,067 65.63%
Said Group............................................................ 80,058 22.16%
Massu Group........................................................... 18,505 5.12%
Sumar Group........................................................... 10,841 3.00%
Other................................................................. 14,751 4.09%
------- ------
Total............................................................ 361,222 100.00%
======= ======
- ----------------------
(1) Certain shares owned by the Principal Shareholders have been pledged to
secure obligations the aggregate amount of which is not material compared
to the value of the shares pledged.
At December 31, 2002, there were 1,235 holders of record of Common Shares
in the form of ADS. It is not practicable for us to determine the number of ADS
or Common Shares beneficially owned in the United States. Approximately 1.3% of
the shares were property of non-Chilean stockholders.
B. Related Party Transactions
Interest Of Management In Certain Transactions
In accordance with the General Banking Law, related parties are defined as
individuals and companies who are directors, officers or shareholders who own
more than 1% of our shares. Companies in which a director, officer or
shareholder holds more than a 5% interest are also considered to be related
parties, as well as companies that have common directors with us. In addition,
the Superintendency can classify any individual or company as "related party"
based on its own judgement. Article 89 of the Chilean Companies Law requires
that a Chilean company's transactions with related parties be on a market basis
or on terms similar to those customarily prevailing in the market.
Under the General Banking Law, a bank may not grant loans to related
parties (including holders of 1% or more of its shares) on more favorable terms
than those generally offered to non-related parties. Loan s to directors,
management and companies in which such individuals have a participation of 5% or
more of equity or net earnings are not permitted under the General Banking Law.
The aggregate amount of loans to related parties may not exceed a bank's Total
Capital. Under the General Banking Law, transactions between a bank and its
affiliates are subject to certain additional restrictions. See "Regulation and
Supervision--Lending Limits".
At December 31, 2002, loans to directors and officers amounted to Ch$32,372
million (US$45.4 million), or 12.6% of our regulatory capital at such date. The
total amount of these loans was distributed among 185 borrowers, with the
average loan being Ch$72 million. All of such loans are current and were made in
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons. See Note
16 to the Consolidated Financial Statements. Expenses incurred in connection
with services rendered by related parties were Ch$3,249 million (US$4.6
million), Ch$3,109 million (US$4.4 million) and Ch$2,775 million (US$3.9
million) for 2000, 2001 and 2002.
101
C. Interests of Experts and Counsel
Not applicable.
Item 8. Financial Information
A. Consolidated Statements and other Financial Information
See Item 18 for the Company's Financial Statement.
See Item 10 for the BBVA Chile's dividend distribution policy.
Legal or Arbitration Proceedings
Until July 23, 1999, Banco BHIF, currently BBVA Chile, had an obligation to
administer the "Adjustment Account" arising from the purchase agreement for the
shares of the former Banco Nacional, dated as of July 23, 1989.
Our management and legal counsel believe that we will not suffer material
losses due to any claims brought by the selling party in connection with the
administration of the "Adjustment Account". Our reasons are as follows.
In the purchase agreement, certain principal shareholders of ours acquired
97% of the shares of Banco Nacional from a group of companies and individuals
related to the selling party. The acquisition was undertaken with a view to the
merger of the former Banco Nacional with Banco BHIF, which was completed on
November 15, 1989.
In connection with the acquisition of the shares of former Banco Nacional
and its subsequent merger with Banco BHIF, we agreed that certain loans due from
the sellers to Banco Nacional would be consolidated into UF-denominated loans,
scheduled to be repaid over a period of 12 years. The purchase agreement
provided that (i) the amount of recoveries on certain of Banco Nacional's loans,
selected by the sellers under the terms of the purchase agreement (Adjustment
Account), exceeding the net book value of the loans, and (ii) an amount equal to
the amount of allowance for loan losses released as a result of improvements in
the classification of the loans included in the Adjustment Account, would be
credited on a quarterly basis to the Adjustment Account and treated as the
payment of interest and principal due from the sellers.
The purchase agreement also provided that any dispute relating to the
interpretation of the agreement or the fulfillment of the parties' respective
obligations thereunder would be submitted to arbitration.
On July 23, 1989, the Adjustment Account was divided in two parts with
terms of five and ten years, respectively. The latter, together with the
sellers' right to the Adjustment Account, expired on July 23, 1999, as mentioned
above.
Due to several disagreements between the sellers, us, our former management
and the buyers, the parties signed an agreement on November 27, 1996 in which
they agreed to submit all present and future disputes relating to the purchase
agreement to arbitration, including those relating to the Adjustment Account,
but excluding any possible future legal actions relating to the collection of
loans which would be submitted to the ordinary courts.
The arbitrators accepted their appointment on February 3, 1997 and the
arbitration court was constituted on April 8 of that year. On June 9, 1997, the
parties agreed on the procedures to be followed in the arbitration process.
To date, the sellers and we have submitted various claims to the
arbitration court, giving rise to several trial procedures that have been
labeled as "Claims" and assigned a correlative number.
During 2001, judgments were rendered on two of the Claims. With respect to
Claims 1 we were sentenced to pay U.F. 19,062 plus interest, totaling
U.F.38,003.20. We complied and credited the equivalent amount in Chilean pesos
to the liabilities due to us by Cidef S.A., the lowest rated company of the
Errazuriz Group. With respect to Claims 2 we were required to pay UF 8,292.12
plus interest, totaling UF 11,216.55. The payment was remitted to the court in
the equivalent amount of Chilean pesos. A significant portion of the latter
amount was retained in favor of BBVA Chile in relation to the proceedings
brought against the Errazuriz Group of companies, that were submitted to the
ordinary courts.
102
In 2002, judgments were rendered on seven of the Claims, and four judgments
were against us. With respect to Claim 3, we were sentenced to pay a total of UF
10,206.67, and we complied by crediting the equivalent amount in Chilean pesos
to the liabilities due to us by Cidef S.A. With respect to Claim 12, we were
required to pay UF 6,053.33 plus interest , and we complied partially by
crediting the equivalent of the principal amount in Chilean pesos to the
liabilities due to us by Cidef S.A., while waiting for the interest to be
established. With respect to Claim 5, we were sentenced to pay UF 27,431.02 plus
interest. We have not been able to comply because the Errazuriz Group improperly
transferred its right to collect from us in connection with Claim 5 and it has
not been possible to determine who the present creditor is. With respect to
Claim 6, we were sentenced to pay UF 42,715.55 plus interest. This payment is on
hold pending the outcome of an appeal we have filed with respect this judgment.
Judgments for three of the seven Claims were in our favor. With respect to
Claim 17, the arbitration panel accepted arguments and determined that Comercial
Las Dalias S.A. was not our creditor. With respect to Claim 9, the arbitration
panel disallowed an allegation asking us to pay UF 4,071.44 plus interest as
indemnification. With respect to Claim 4, the arbitration panel rejected both
our claim and the Errazuriz Group`s counterclaim.
In 2003, judgment was rendered on Claim 10, requiring us to pay a total of
UF 1,743 UF. The credit is still in the process of being liquidated. Judgment
was also rendered on Claim 7, and we complied by crediting the equivalent of UF
9,261.29 in Chilean pesos to the liabilities due to us by companies of the
Errazuriz Group who are beneficiaries of the Adjustment Account.
We also submitted claim against the Errazuriz Group asking for an
indemnification, which was registered as Claim 28.
The following is the status of the remaining Claims: One will begin the
discussion period and nine have already concluded their discussion period; five
are in the process of evidence production and two have concluded such period and
are ready for judgment.
Considering the procedural stage of some of the pending proceedings and the
complexity of the matters dealt with in others, it is difficult to determine the
likely outcome of the actions brought against us, and no assurance can be given
that the final outcome will not be adverse to us.
In late 2000 we were notified of seven consignment and compensation
payments made by debtors of the Errazuriz Group beneficiaries of the Adjustment
Account in relation to the loans payable to us with a view to extinguish total
obligations. However, as a result of our opposition the resolutions have been
appealed.
In light of the above, we filed claims in Court for the collection of the
total amount due from each of the beneficiaries of the Errazuriz Group, on the
grounds that the debtor waived the period granted to each of them. To date, six
of our claims have been ruled and one is ready for judgment. Of the rulings
already delivered, three were in our favor and the other three were against us
on formal grounds. These rulings basically stated that the offer of total and
subsequent consignment payments did not imply a waiver of the period granted to
each debtor, therefore the loans would not have been required to be paid upon
filing the claim. Although these rulings were against us, in principle they were
not because the existence of these loans had been recognized by the debtors.
Both the Bank and the defendants filed an appeal on the issue, which is pending
hearing.
In addition, in 2000 we were notified of three additional consignment and
compensation payments made by debtors of the Errazuriz Group who were not
beneficiaries of the Adjustment Account, with a view to extinguish total
obligations. We responded by asking for the judicial collection of these
obligations, and to date we have been able to collect on two of them, for a
total of UF 188,120.35, and the third is pending judgment.
The Errazuriz Group filed in Court three allegations against us based on
the rulings of the arbitration court on Claims 1,3,5, and 6. In all cases the
Bank has filed defense on the grounds that (a) the allegations ask for the
payment of obligations that have already been paid for with respect to Claims 1
and 3; (b) the allegation ask for the payment of credits improperly transferred
with respect to Claim 5; and (c) the allegations ask for payment of obligations
which are not yet due with respect to Claim 6. Of these claims, one has
concluded the process of delete the process of evidence production, another will
begin evidence production and the remaining one will begin its discussion
period.
103
All payments made on these allegations have been charged against the allowance
previously made for the corresponding loans. Such allowance is included in the
general allowance for loan losses.
B. Significant Changes
No significant change has occurred since the date of the annual financial
statements.
Item 9. The Offer and Listing
A. Offer and Listing Details
Nature Of Trading Market
On June 24, 1996, we completed the public offering in Chile and
internationally (the "Combined Offering") of our Series G common shares ("Series
G Shares") and American Depositary Shares each representing ten Series G Shares.
Prior to the Combined Offering, we had six series of shares (A through F)
outstanding. Upon discharge in full of the Central Bank Subordinated Debt, each
outstanding share of Series A through F was converted into a Series G Share.
Following the Combined Offering, the public market for the ADS and for Series G
Shares in the United States, Chile or elsewhere improved significantly. At an
Extraordinary Shareholders' Meeting held on April 1, 1997, the name of the
Series G Shares was changed to Common Shares. As of December 31, 2002, 65.6% of
the outstanding Shares of our capital stock was held by BBVA, 30.3% was held by
the Former Principal Shareholders (and entities controlled by or affiliated with
them), 1.3% was held by investors abroad in the form of ADS and 2.8% was held by
Chilean institutional investors and by the public.
Market Volume and Price Information
During 2002, Common Shares were traded daily on the Santiago Stock Exchange
at a rate of 0.04% of the average number of Common Shares outstanding during
2002, accounting for approximately 1.2% of the trading volume on the Santiago
Stock Exchange over the same period. During 2002, the ADS were also traded daily
on the NYSE, at a rate of 0.03% of the average number of Common Shares
outstanding during 2002.
The table below sets forth, for the periods indicated, the reported low and
high closing prices and daily average trading volumes for Common Shares, where
indicated, on the Santiago Stock Exchange and on the New York Stock Exchange.
See "Exchange Rates" for the exchange rates applicable during the periods set
forth below. The information set forth in the table below reflects actual
historical amounts at the trade dates and has not been restated in constant
Chilean pesos.
104
----------------------------------------------------------------------------
Daily Average
Shares Ch$ per Share Daily Average US$ per ADR
------ -------------- ADR --------------
Year ended December 31, Trading Volume Low High Trading Volume Low High
- ----------------------- -------------- --- ---- -------------- --- ----
1998............................. 144,912 400 716 23,824 8 16
1999............................. 27,836 343 875 14,035 7 17
2000............................. 12,259 740 950 2,836 14 19
2001
First Quarter ................... 13,569 830 950 20,634 15 16
Second Quarter .................. 106,061 930 1,080 26,728 16 18
Third Quarter ................... 19,081 879 1,060 984 13 17
Fourth Quarter .................. 21,538 850 950 3,277 12 14
2002
First Quarter ................... 60,506 770 920 5,259 12 14
Second Quarter .................. 127,719 760 840 5,025 11 13
Third Quarter ................... 128,837 700 850 14,332 10 12
Fourth Quarter .................. 270,148 800 950 14,482 11 14
December......................... 353,521 810 950 4,273 12 14
2003
January.......................... 37,323 935 1,000 1,195 13 13
February......................... 41,797 989 995 3,155 13 14
March............................ 66,726 955 1,010 8,720 13 14
April............................ 6,871 1,000 1,070 3,669 13 15
May.............................. 22,063 1,020 1,080 1,084 15 15
- ----------------------
Source: Santiago Stock Exchange, New York Stock Exchange.
On December 31, 1998, the closing sale price per Common Share on the
Santiago Stock Exchange was Ch$450 (equivalent to US$0.95 at Ch$473.77 per
US$1.00, the Observed Exchange Rate on such date). On December 31, 1998, the
closing sale price per ADS on the New York Stock Exchange was US$7.750. On
December 31, 1999, the closing sale price per Common Share on the Santiago Stock
Exchange was Ch$815 (equivalent to US$1.54 at Ch$527.70 per US$1.00, the
Observed Exchange Rate on such date). On December 31, 1999, the closing sale
price per ADS on the New York Stock Exchange was US$14.88. On December 31, 2000,
the closing sale price per Common Share on the Santiago Stock Exchange was
US$1.47 On December 31, 2000, the closing sale price per ADS on the New York
Stock Exchange was US$14.8. On December 31, 2001, the closing sale price per
Common Share on the Santiago Stock Exchange was Ch$920 (equivalent to US$1.4 at
Ch$656.20 per US$1.00, the Observed Exchange Rate on such date). On December 31,
2001, the closing sale price per ADS on the New York Stock Exchange was
US$13.40. On December 31, 2002, the closing sale price per Common Share on the
Santiago Stock Exchange was Ch$940 (equivalent to US$1.32 at Ch$712.38 per
US$1.00, the Observed Exchange Rate on such date). On December 31, 2002, the
closing sale price per ADS on the New York Stock Exchange was US$13.17. On April
30, 2003 the closing sale price per Common Share on the Santiago Stock Exchange
was Ch$1060 (equivalent to US$1.50 at Ch$705.32 per US$1.00, the Observed
Exchange Rate on such date). On April 30, 2003, the closing sale price per ADS
on the New York Stock Exchange was US$14.83.
At December 31, 2002, there were 1,235 holders of record of Common Shares.
It is not practicable for us to determine the number of ADS or Common Shares
beneficially owned in the United States. Approximately 1.3% of the shares were
property of non-Chilean stockholders.
The ADS and the Common Shares have been listed on the New York Stock
Exchange and on the Santiago Stock Exchange since June 18, 1996, respectively.
Dividends
The terms of the Central Bank Subordinated Debt imposed a limit on the
amount of dividends we could pay on its Shares. See "Central Bank Subordinated
Debt". After repayment in full of the Central Bank Subordinated Debt, there are
no legal restrictions on the payment of dividends from our net income. The
shareholders may determine
105
upon recommendation of the Board of Directors to distribute a percentage of net
income in any given year in order to maintain our ability to meet the targets of
the annual Investment and Financing Policy approved by the shareholders'
meeting.
Dividends payable to holders of ADS will be paid net of foreign currency
conversion fees and expenses of the Depositary and will be subject to Chilean
withholding tax currently imposed at a rate of 35% (subject to credits in
certain cases as described under "Taxation"). Owners of the ADS will not be
charged any dividend remittance fees by the Depositary with respect to cash
dividends. See "Taxation".
Chilean law requires that holders of shares of Chilean companies that are
not residents of Chile register as foreign investors under one of the foreign
investment regimes established by Chilean law in order to have dividends, sale
proceeds or other amounts with respect to their shares remitted outside Chile
through the Formal Exchange Market. Under the Foreign Investment Contract, the
Depositary, on behalf of ADS holders, will be granted access to the Formal
Exchange Market to convert cash dividends from Chilean pesos to U.S. dollars and
to pay such U.S. dollars to ADS holders outside Chile. See "Exchange Controls
and Other Limitations Affecting Security Holders".
Under the current Ley General de Bancos (the "General Banking Law"), a
Chilean bank may only pay a single dividend per year (i.e., interim dividends
are not permitted). Pursuant to our By-laws, the annual dividend is proposed by
the Board of Directors and approved by the shareholders at the annual ordinary
shareholders' meeting held in the first four months of the year following the
year with respect to which the dividend is proposed. Following shareholder
approval, the dividend is declared and paid to shareholders of record on the
fifth business day preceding the date set for payment of the dividend. The
applicable record dates for the payment of dividends to holders of ADS will, to
the extent practicable, be the same. Under the Chilean Companies Law, Chilean
public corporations are generally required to distribute at least 30% of their
earnings (calculated in accordance with Chilean GAAP) as dividends, but a bank
is permitted to distribute less than such minimum amount in any given year if
the holders of at least two-thirds of the bank's outstanding stock so determine.
B. Plan of Distribution
Not applicable.
C. Markets
The ADS and the Common Shares have been listed on the New York Stock
Exchange and on the Santiago Stock Exchange since June 18, 1996, respectively.
D. Selling Shareholders
Not appplicable.
E. Dilution
Not appplicable.
F. Expenses of the Issue
Not appplicable.
Item 10. Additional Information
A. Share capital
Not appplicable.
106
B. Memorandum and Articles of Association
Set forth below is certain information concerning our share capital and a
brief summary of certain significant provisions of our By-laws and Chilean law.
All rights and obligations of BBVA Chile's shareholders are contained in our
by-laws (a copy of which has been filed as an exhibit to this 20-F), the General
Banking Law, the Chilean Companies Law and the Ley de Mercado de Valores No.
18,045 (the "Securities Market Law"), each referred to below.
General
Shareholders' rights in a Chilean bank that is also an open-stock (public)
corporation are governed by the corporation's estatutos (which effectively serve
the purpose of both the articles or certificate of incorporation and the by-laws
of a company incorporated in the United States), by the General Banking Law and
by the provisions of the Chilean Companies Law applicable to open stock
corporations, to the extent applicable and not inconsistent with the General
Banking Law. Additionally, Article 137 of the Chilean Companies Law provides
that all provisions of the Chilean Companies Law take precedence over any
contrary provision in a corporation's estatutos. Both the Chilean Companies Law
and our By-laws provide that legal actions by shareholders against us (or our
officers or directors) to enforce their rights as shareholders or by one
shareholder against another in their capacity as such are to be brought in Chile
in arbitration proceedings or, at the option of the plaintiff, in the ordinary
courts in Santiago, Chile.
The Chilean securities markets are principally regulated by the SVS under
the Securities Market Law and the Chilean Companies Law. In the case of banks,
compliance with these laws is supervised by the Superintendency of Banks. These
two laws provide for disclosure requirements, restrictions on insider trading
and price manipulation, and protection of minority investors. The Securities
Market Law sets forth requirements relating to public offerings, stock
exchanges, brokers and dealers, and outlines disclosure requirements for
companies that issue publicly offered securities. The Chilean Companies Law sets
forth rules and requirements for establishing open stock corporations while
eliminating government supervision of closed (closely-held) corporations. Open
stock (public) corporations are those with 500 or more shareholders, or
companies in which 100 or more shareholders own at least 10% of the subscribed
capital, excluding those shareholders who individually, or through other
individuals or companies, exceed such percentage, and all other companies that
publicly offer their stock.
Ownership Restrictions
Under Article 12 of the Securities Market Law and the regulations of the
Superintendency of Banks, certain information regarding transactions in shares
of banks must be reported to the SVS and the Chilean stock exchanges.
Shareholders of a bank who are holder of 10% or more of such bank's capital or
directors, general managers or managers of such bank are required to report to
the SVS and the Chilean stock exchanges any direct or indirect acquisition or
sale of shares or options to buy or sell shares, in any amount.
Additionally, there are also reporting requirements for any shareholder who
controls 10% or more of a bank, to identify in each purchase of shares, whatever
its number may be, if his final intent is to control the company or to make an
investment.
A beneficial owner of ADS representing 10% or more of our share capital
will be subject to these reporting requirements under Chilean law.
Under Article 54 of the Securities Market Law and the regulations of the
Superintendency of Banks, any person who directly or indirectly, pretends to
take over the control of a bank that makes a public offer of its shares,
regardless of the form of acquisition of the shares, including that which could
be made by direct subscriptions or private transactions, shall previously report
such fact to the public in general.
For the purposes indicated in the preceding paragraph, written notice will
be sent to such effect to the stock corporation that it is intended to control,
to the companies that are the controllers and are controlled by the company
whose control it is intended to obtain, to the SVS and to the Stock Exchanges
where such securities are traded. With
107
the same purpose, a prominent notice will be published in two newspapers of
national circulation. The communication and the publication just mentioned shall
be made, at least, ten business days in advance from the date on which it is
pretended to implement the act that will permit obtaining the control of the
respective stock corporation and, in any event, as soon as negotiations have
commenced tending to achieve its control, through the delivery of information
and documents of that company. Violation of this article will not invalidate the
operation, but shall give the shareholders or third parties who are interested
the right to demand indemnification for damages caused, apart from the pertinent
administrative penalties.
Should it be intended to obtain control through an offer regulated in Title
XXV of the Securities Market Law the provisions of such Title shall be applied
exclusively. On December 20, 2000, it was enacted the new tender offer law
(known as "OPA Law") which in general terms, regulates transactions through
which control of a corporation that makes public offer of its shares changes, as
well as transactions in which a controlling shareholder or group increases
control to over 66 2/3%. For this purpose, "control" means de facto control,
being the acquisition of a sufficient shareholding to permit the acquirer to
exercise the majority of the votes in shareholders' meetings, thus allowing for
the election of a majority of the board of directors of the target company, or
to allow the acquirer to have decisive power in the administration of the target
company. The first requirement of the new OPA Law is enhanced disclosure of the
intention to accumulate shares or acquire control. The OPA Law has further
elaborated on the amount of information to be provided by the intended purchaser
to the market, through a publication to be made in the newspapers providing a
full disclosure on the terms of the proposed transaction to be carried out to
obtain control. If a transaction which will result in the acquisition of control
of a Chilean open stock corporation is to occur, the OPA Law requires the
acquirer to launch a tender offer subject to the rules established in Title XXV
of the Securities Market Law, including the obligation to carry out the tender
offer on a pro-rata and a non discriminatory basis, and the obligation of making
available for the shareholders a prospectus which discloses the terms and
conditions of the offer.
The OPA Law also contemplates anti-avoidance rules aimed at the acquisition
of control of a company that controls an open stock corporation where the shares
of the open stock company constitute more than 75% of the book value of the
consolidated assets of the controlling company. In such circumstances, the
purchaser will be required to make an offer for the remaining shares of the open
stock company at the same pro rated price as is paid for the controlling
company. While the legislation could be more specific, the end result is that if
the acquirer ends up with control of the company in a transaction fairly close
to other small transactions, he may be liable for a breach of these rules and
fined for up to 30% of the value of the transaction and criminal sanctions. In
addition, the OPA Law contains a number of limited exemptions from the
obligations to make a bid in accordance with article 54 of the Securities Market
Law as set forth above.
Finally, the OPA Law also contemplates transitional rules which would
exclude the operation of the OPA Law in the following cases: (i) When a present
controlling shareholder sells to an unrelated new controlling shareholder within
a three year period after the OPA Law comes into effect. To be entitled to this
right a special shareholders meeting must agree, within 6 months following to
the enactment of the law, that the corporation is going to be subject to the
transitional rule; (ii) The sales and purchases that are performed in fulfilment
of the rights granted by a shareholders agreement executed prior to the
enactment of the law.
The shareholders of BBVA Chile have not passed any decision regarding such
transitory rule therefore making it non applicable.
Article 36 of the General Banking Law states that as a matter of public
policy, no person or company may acquire, directly or indirectly, more than 10%
of the shares of a bank without the prior authorization of the Superintendency
of Banks, which may not be unreasonably withheld. The prohibition would also
apply to beneficial owners of ADS. In the absence of such authorization, any
person or group of persons acting in concert would not be permitted to exercise
voting rights with respect to the shares or ADS acquired. In determining whether
or not to issue such an authorization, the Superintendency of Banks considers a
number of factors enumerated in the General Banking Law, including the financial
stability and probity of the purchasing party.
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Article 84 No. 2 of the General Banking Law creates the presumption that
natural persons who are holders of Shares and who beneficially own more than 1%
of the Shares are related to us and imposes certain restrictions on the amounts
and terms of loans made by banks to related parties. This presumption would also
apply to beneficial owners of ADS representing more than 1% of the Shares.
Finally, according to the regulations of the Superintendency of Banks, Chilean
banks that issue ADS are required to inform the Superintendency of Banks if any
person, directly or indirectly, acquires ADSs representing 5% or more of the
total amount of shares of capital stock issued by such bank.
Neither Chilean law nor the By-laws impose specifically on nonresident or
foreign owners any limitations on the rights of such owners to hold or vote the
Shares.
Capitalization
Under Chilean law, the shareholders of a company, acting at an
extraordinary shareholders' meeting, have the power to authorize an increase in
such company's capital. This shareholders' meeting resolution that increases the
bank's capital must be approved or rejected by the Superintendency of Banks
within a term of 30 days. The Superintendency of Banks may extend this term up
to 30 days more. When an investor subscribes for issued shares, the shares are
issued and registered in such investor's name, even if not paid for, and the
investor is treated as a shareholder for all purposes except with respect to
receipt of dividends and the return of capital. The investor becomes eligible to
receive dividends once it has paid for the shares (if it has paid for only a
portion of such shares, it is entitled to receive a corresponding pro rata
portion of the dividends declared with respect to such shares unless the
company's by-laws provide otherwise). If an investor does not pay for shares for
which it has subscribed on or prior to the date agreed upon for payment, the
company is entitled under Chilean law to auction the shares on the stock
exchange where such shares are traded, and it has a cause of action against the
investor for the difference, if any, between the subscription price and the
auction proceeds. However, until such shares are sold at auction, the subscriber
continues to exercise all the rights of a shareholder (except the right to
receive dividends and return of capital). In the case of banks, authorized
shares and issued shares which have not been paid for within the period fixed
for their payment by the Superintendency of Banks are cancelled and are no
longer available for issuance by the company.
Article 22 of the Chilean Companies Law states that the purchaser of shares
of a company implicitly accepts its by-laws and any agreements adopted at
shareholders' meeting.
Preemptive Rights and Increases of Share Capital
The Chilean Companies Law provides that whenever a Chilean company issues
new shares for cash, it must offer its existing shareholders the right to
purchase a sufficient number of shares to maintain their existing ownership
percentages in the company. The OPA Law now requires that ADS holders be given
the same rights as local shareholders. Pursuant to this requirement, preemptive
rights in connection with any future issue of shares will be offered by us to
the Depositary as the registered owner of the Shares underlying the ADS. See
"Cash Dividends and Other Distributions".
Under Chilean law, preemptive rights are exercisable or freely transferable
by shareholders during a period which cannot be less than 30 days following the
granting of such rights. During such period (for shares as to which preemptive
rights have been waived), and for an ensuing period (up to the term fixed by the
shareholders' meeting to pay the increase in capital, which cannot exceed three
years), a Chilean open stock corporation is permitted to offer any unsubscribed
shares for sale to third parties on terms which are equal to or less favorable
to such purchasers than those offered to its shareholders. At the end of a
30-day period following the preemptive rights period, a Chilean open stock
corporation is authorized to sell non-subscribed shares to third parties on more
favorable terms to such purchasers, provided they are sold on a stock exchange.
Shareholders' Meetings and Voting Rights
An ordinary annual meeting of shareholders is held within the first four
months of each year, but in any case following the preparation of our financial
statements for the previous year. The ordinary annual meeting of
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shareholders is the corporate body that approves the annual financial
statements, approves all dividends in accordance with the dividend policy
determined by the Board of Directors, elects the Board of Directors and approves
any other matter which does not require an extraordinary shareholders' meeting.
The last ordinary annual meeting of our shareholders was held on March 17th,
2003. Extraordinary meetings may be called by the Board of Directors when deemed
appropriate, and ordinary or extraordinary meetings must be called by the Board
of Directors when requested by shareholders representing at least 10% of the
issued voting shares or when requested by the Superintendency of Banks. Notice
to convene the ordinary annual meeting or an extraordinary meeting is given by
means of three notices which must be published in a newspaper published in our
corporate domicile (currently Santiago) in a prescribed manner, and the first
notice must be published not fewer than 15 days nor more than 20 days in advance
of the scheduled meeting. Notice must also be mailed no fewer than 15 days in
advance to each shareholder and given to the Superintendency of Banks and the
Chilean Stock Exchanges. Currently, we publish our official notice in La Nacion.
The quorum for a shareholders' meeting is established by the presence, in
person or by proxy, of shareholders representing at least an absolute majority
of the issued Shares; if a quorum is not present at the first meeting, the
meeting can be reconvened within 45 days (in accordance with the procedures
described in the previous paragraph) and, upon the meeting being reconvened,
shareholders present or represented at the reconvened meeting are deemed to
constitute a quorum regardless of the percentage of Shares represented. The
shareholders' meetings pass resolutions by the affirmative vote of an absolute
majority of those Shares with voting rights present or represented at the
meeting. The vote required at any shareholders' meeting to approve any of the
following actions, however, is a two-thirds majority of issued Shares: (i) a
change of organization, merger or spin-off, (ii) an amendment to our term of
existence or early dissolution, (iii) a change in corporate domicile, (iv) a
decrease of corporate capital, (v) the approval of capital contributions in kind
and a valuation of the assets contributed, (vi) a modification of the powers of
shareholders or limitations on the powers of the Board of Directors, (vii) a
reduction in the number of members of the Board of Directors, (viii) the
transfer of 50.0% or more of the corporate assets, regardless of whether it
includes liabilities, or the formation or amendment of any business plan that
contemplates the transfer of more than 50.0% of the corporate assets, (ix) any
non-cash distribution in respect of the Shares, (x) the emission of convertible
bonds or debentures, or (xi) the approval of material related-party transactions
when requested by shareholders representing at least 5.0% of the issued and
outstanding shares with right to vote. Shareholders may accumulate their votes
for the election of directors and cast the same in favor of one person. The vote
required to change the number of members who make up the Board of Directors is
91% of voting shares present or represented, and the same majority is needed to
change this requirement.
In general, Chilean law does not require a Chilean open stock corporation
to provide the level and type of information that United States securities laws
require a reporting company to provided to its shareholders in connection with a
solicitation of proxies. However, shareholders are entitled to examine the books
of the company within the 15-day period before the scheduled meeting. Under
Chilean law, a notice of a shareholders' meeting listing matters to be addressed
at the meeting must be mailed not less than 15 days prior to the date of such
meeting, and, in the cases of an ordinary annual meeting, shareholders holding a
prescribed minimum investment must be sent an annual report of the company's
activities which includes audited financial statements. Shareholders who do not
fall into this category but who request it must also be sent a copy of the
company's annual report. In addition to these requirements, we regularly
provide, and our management currently intends to continue to provide, together
with the notice of shareholders' meeting, a proposal for the final annual
dividend.
The Chilean Companies Law provides that wherever shareholders representing
10% or more of the issued voting shares so request, a Chilean company's annual
report must include, in addition to the materials provided by the Board of
Directors to shareholders, such shareholders' comments and proposals in relation
to the company's affairs. Similarly, the Chilean Companies Law provides that
whenever the Board of Directors of an open stock corporation convenes an
ordinary meeting of the shareholders and solicits proxies for that meeting, or
distributes information supporting its decisions, or other similar material, it
is obligated to include as an annex to its annual report any pertinent comments
and proposals that may have been made by shareholders owning 10% or more of the
company's voting shares who have requested that such comments and proposals be
so included.
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Only shareholders registered as such with us on the fifth business day
prior to the date of a meeting are entitled to attend and vote their shares. A
shareholder may appoint another individual (who need not be a shareholder) as
his proxy to attend and vote on its behalf. Every shareholder entitled to attend
and vote at a shareholders' meeting has one vote for every share subscribed.
Approval of Financial Statements
The Board of Directors is required to submit our audited financial
statements to the shareholders annually for their approval. The approval or
rejection of such financial statements is entirely within the shareholders'
discretion. If the shareholders reject the financial statements, the Board of
Directors must submit new financial statements not later than 60 days from the
date of such rejection. If the shareholders reject the new financial statements,
the entire Board of Directors is deemed removed from office and a new Board is
elected at the same meeting. Directors who individually approved such financial
statements are disqualified for re-election for the ensuing period.
Registration and Transfers
We act as our own registrar and transfer agent, as is customary among
Chilean companies. In the case of jointly owned Common Shares, a single person
must be appointed to represent the joint owners in dealings with us. This person
may be either one of the joint owners or their legal representative.
C. Material Contracts
On September 24, 1998, Banco Bilbao Vizcaya, S.A. (now BBVA) entered into
an agreement (the "Agreement") with Inversiones Caburga S.A., Inversiones del
Pacifico S.A., Compania de Leasing y Arriendo S.A., Inversiones Santa Virginia
Limitada, Panamerican Holdings Limited Agency in Chile, Inversiones Valparaiso
S.A., Inversiones Corinto Limitada and Fundacion Educacional de Beneficencia
Maria Teresa Brown de Ariztia; and Jose Domingo Eluchans Asesorias Limitada,
(collectively, "the former controllers"). We refer to all the parties to the
agreement as "the "Shareholders".
In their capacities as our controlling Shareholders, the parties agreed to
coordinate their actions in order to jointly manage and develop our business. To
this end, they agreed upon operating standards for us and our subsidiaries,
which complement those required by law, regulations and our By-laws. The
principal standards refer to:
Board of Directors. According to the Agreement, the Board shall be
composed of nine office holders and two alternates and, in the event of a
merger or acquisition, the number of members may be increased to 11. Given
the composition of the Shareholders, the parties to the Agreement may
appoint all of the directors, with BBVA presently entitled to appoint a
majority of the Board. In addition the parties agreed upon rules to be
applied to the appointment of the Chairman, to the replacement of
directors, for setting dates for Board meetings, for passing resolutions
and to the appointment of the General Manager and the exercise of some of
his most important faculties.
Shareholders' meeting. Resolutions will be passed pursuant to
requirements prescribed by law and the By-laws, with the requirement that
at least one of the former controllers must form part of the majority vote
for the following matters: mergers, early dissolution, a combined sale of
the assets and the liabilities or all of the assets, or a substantial
portion thereof, modification of the dividend distribution policy or the
By-laws, or any matters that, pursuant to the Agreement, require the
approval of at least one director appointed by each party of the agreement.
Transfer of shares. The parties recognize a preemptive right in the
event that any of them intend to sell their Shares.
Purchase of shares on the market by the parties. This standard
regulates the purchase and sale of Shares on the Stock Exchange.
Third-party purchases, are freely authorized provided the purchases are on
the Stock Exchange and the purchaser fulfills the obligation of offering
the other Shareholder a percentage of the Shares purchased at unit
acquisition cost, which percentage must be equal to the relative holdings
of the Shareholders at the time.
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The sale of shares on the Stock Exchange is only permitted if, having
fulfilled the obligation of offering its acquisition to the other party,
that party is not interested.
New business. The parties declare their intention to look into new
business in Chile in the future, in the form of holdings substantially
similar to what they had at that time.
Dividend policy. Dividend policy will be to make annual distributions
of at least 50% of the income that pursuant to applicable regulations would
be subject to distribution.
Starting date, duration and term. The Agreement took effect on
September 24, 1998 for an indefinite duration unless an event that enables
any party to terminate the agreement occurs.
Irreconcilable differences, mediation. In cases in which the Board or
Shareholders are not able to pass resolutions in fulfillment of this
Agreement, differences shall be submitted to a neutral mediator. If no
agreement can be reached, the parties have the right to terminate the
Agreement.
D. Exchange Controls
Exchange Controls
The Central Bank is responsible for, among other things, monetary policy
and exchange controls in Chile. Foreign investments in Chile (including
investments in shares or Common Stock) can be made under the following
regulations: (i) registration with the "Foreign Investment Committee" under
Decree Law No. 600 of 1974 as amended ("Decree Law No, 600") or (ii) according
to Chapter XIV of the Compendium.
Foreign investment made under Decree Law No. 600 gives foreign investors
access to the Formal Exchange Market once the foreign currency is converted into
Chilean pesos. Under Decree Law No. 600 foreign investors may transfer abroad
their capital and the net profits from their investments in Chile. Capital may
be remitted after one year has elapsed counted from the date on which the
foreign currency it was brought in. Profits can be remitted with no time limit.
Decree Law No. 600 gives the foreign investors access to the Formal Exchange
Market in order to remit capital and net profits abroad.
Since April 19, 2001 foreign investments made under Chapter XIV are not
subject to restrictions other than the requirement that all foreign currency
brought into the country or remitted abroad by the foreign investor should be
made through the Formal Exchange Market and to provide certain information to
the Central Bank. Under Chapter XIV, foreign investors do not have granted
access to the Formal Exchange Market as is the case under Decree Law No. 600,
however, for the purpose of remitting capital and net profit abroad, foreign
investors are entitled to purchase foreign currency either in the Formal
Exchange Market or in the informal exchange market. Foreign investments made
prior to April 19, 2001 are subject to the regulations of Chapter XIV that were
in place at the time such foreign investment was made, unless the foreign
investor, voluntarily, decides to be subject to the current regulations of
Chapter XIV.
Pursuant to Article 47 of the Central Bank Act, the Central Bank may enter
into agreements with investors or creditors, both foreign or local, and other
parties in a foreign exchange transaction, to regulate the terms and conditions
under which the capital, interest, profits and benefits generated by such
foreign exchange transaction may be utilized, remitted abroad or reimbursed to
the local investor or creditor and to assure them free access to the Formal
Exchange Market. According to Article 47 of the Central Bank Act, agreements
entered into by the Central Bank pursuant to Article 47 may only be modified by
mutual agreement of all parties to the contract.
Until April 19, 2001, Chapter XXVI, Title I of the Compendium ("Chapter
XXVI") regulated the issuance of ADS by a Chilean company and the access to the
Formal Exchange Market for the purpose of converting Chilean pesos to U.S.
dollars and repatriating from Chile amounts received in respect of shares
deposited or shares withdrawn from deposit or surrender of ADSs (including
amounts received as cash dividends and proceeds from the sale in Chile of the
underlying shares and any rights with respect thereto).
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On April 19, 2001, Chapter XXVI was derogated by the Central Bank and it
established under Chapter XIV that will be considered "investments", for the
purpose of Chapter XIV, the acquisition of shares of Chilean open stock
corporations to be withdrawn in exchange for a certificate representing such
shares, as is the case of ADSs, that are traded in foreign markets.
Additionally, the Central Bank sets forth on Chapter XIV that the withdrawn of
shares in exchange for a certificate representing such shares or reverse will be
subject to the rules applicable under Chilean law.
Even though the Central Bank eliminated Chapter XXVI, all ADSs that have
been issued according to Article 47 of the Central Bank Act and Chapter XXVI
will be subject to such regulations and to their own Foreign Investment
Contract, without regard of the derogation of Chapter XXVI.
The ADS representing Common Shares are the subject of a contract dated June
19, 1996 (the "Foreign Investment Contract") between the Central Bank, us and
the Bank of New York as Depositary, pursuant to Article 47 of the Central Bank
Act and Chapter XXVI.
The following is a summary of material provisions in the Foreign Investment
Contract. This summary does not purport to be complete and is qualified in its
entirety by reference to the Foreign Investment Contract.
Under Chapter XXVI and the Foreign Investment Contract, the Central Bank
agrees to grant to the Depositary, on behalf of ADS holders, and to any investor
not residing or domiciled in Chile who withdraws Common Shares upon delivery of
ADSs (such Common Shares being referred to herein as "Withdrawn Shares"), access
to the Formal Exchange Market to convert Chilean pesos to dollars (and remit
such dollars outside of Chile) in respect of Common Shares represented by ADS or
Withdrawn Shares, including amounts received as (a) cash dividends, (b) proceeds
from the sale in Chile of Withdrawn Shares (subject to receipt by the Central
Bank of a certificate from the holder of the Withdrawn Shares (or from an
institution authorized by the Central Bank) that such holder's residence and
domicile are outside Chile and a certificate from a Chilean stock exchange (or
from a brokerage or securities firm established in Chile that such Withdrawn
Shares were sold on a Chilean Exchange) or from shares distributed because of
the liquidation merger or consolidation of the Bank, (c) proceeds from the sale
in Chile of rights to subscribe for additional Common Shares, (d) proceeds from
the liquidation, merger or consolidation of BBVA Banco BHIF, and (e) other
distributions, including without limitation those resulting from any
recapitalization, as a result of holding Common Shares represented by ADS or
Withdrawn Shares. Transferees of Withdrawn Shares will not be entitled to any of
the foregoing rights under Chapter XXVI unless the Withdrawn Shares are
redeposited with the custodian. Investors receiving Withdrawn Shares in exchange
for ADSs will have the right to redeposit such Common Shares in exchange for
ADSs, provided that the conditions to redeposit are satisfied. For a description
of the Formal Exchange Market, see "Exchange Rates". Chapter XXVI provides that
access to the Formal Exchange Market in connection with dividend payments is
conditioned upon certification by BBVA Banco BHIF to the Central Bank that a
dividend payment has been made and any applicable tax has been withheld, which
certification BBVA Banco BHIF has agreed to provide at the appropriate time.
Chapter XXVI also provides that access to the Formal Exchange Market in
connection with the sale of Withdrawn Shares or distributions thereon is
conditioned upon receipt by the Central Bank of certification by the custodian
that such Common Shares have been withdrawn in exchange for ADSs and receipt of
a waiver of the benefit of the Foreign Investment Contract with respect thereto
(except in connection with the proposed sale of the Common Shares) until such
Withdrawn Shares are redeposited.
Chapter XXVI and the Foreign Investment Contract provide that a person who
brings foreign currency into Chile to purchase Common Shares with the benefit of
the Foreign Investment Contract must convert it into Chilean pesos on the same
date and has five banking business days within which to invest in Common Shares
in order to receive the benefits of the Foreign Investment Contract. If such
person decides within such period not to acquire Common Shares, he can access
the Formal Exchange Market to reacquire dollars, provided that the applicable
request is presented to the Central Bank within seven banking business days of
the initial conversion into Chilean pesos. Common Shares acquired as described
above may be deposited for ADS and receive the benefits of the Foreign
Investment Contract, subject to receipt by the Central Bank of a certificate
from the Depositary that such deposit has been effected and that the related
ADSs have been issued and receipt by the Custodian of a declaration
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from the person making such deposit waiving the benefits of the Foreign
Investment Contract with respect to the deposited Common Shares.
Access to the Formal Exchange Market under any of the circumstances
described above is not automatic. Pursuant to Chapter XXVI, such access requires
approval of the Central Bank based on a request therefore presented through a
banking institution established in Chile. The Foreign Investment Contract
provides that if the Central Bank has not acted on such request within seven
banking days, the request will be deemed approved.
Until June 26, 1998, foreign investors acquiring shares or securities in
the Chilean secondary market should maintain a mandatory reserve ("Reserve")
with the Central Bank in an amount equal to 30% of the amount of the investment
or alternatively foreign investors might choose to satisfy such reserve
requirements by making a payment to the Central Bank of a non-refundable amount
calculated in regard to the amount that must have been deposited. The deposit
had to be done for one year in the form of a non-interest bearing U.S. dollars
deposit.
On June 26, 1998, the Reserve was reduced to 10% and on September 17, 1998
to 0% of the investment. Notwithstanding the mentioned reserve reduction, the
Central Bank can increase the Reserve at any moment until 40% of the amount of
the investment. No assurance can be given that the Central bank would not
increase the amount of the Reserve. However, under Chilean law such increase
would only be imposed upon investments brought into Chile after the increase of
the Reserve becomes effective.
Under current Chilean law, the Foreign Investment Contract cannot be
changed unilaterally by the Central Bank. No assurance can be given, however,
that additional Chilean restrictions applicable to the holders of ADSs, the
disposition of underlying Common Shares or the repatriation of the proceeds from
such disposition could not be imposed in the future, nor can there be any
assessment of the duration or impact of such restrictions if imposed. See also
"Description of By-laws--Ownership restrictions"
E. Taxation
Chilean Tax Considerations
The following discussion summarizes the principal Chilean income tax
consequences of the purchase, ownership and disposition of ADS or Common Shares
by an individual who is not domiciled or resident in Chile or by a legal entity
that is not organized under the laws of Chile and does not have a permanent
establishment located in Chile (any such individual or entity, a "Foreign
Holder"). For purposes of Chilean tax law, an individual holder is a resident of
Chile if he has resided in Chile for more than six consecutive months in one
calendar year or for a total of more than six months, whether consecutive or
not, in two consecutive tax years. The discussion is not intended as tax advice
to any particular investor, which can be rendered only in light of that
investor's particular tax situation.
This summary is based upon the tax laws of Chile and relevant
interpretations thereof (including Ruling No. 324 of January 29, 1990 of the
Chilean Internal Revenue Service and other applicable regulations and rulings)
in effect on the date of this Annual Report, all of which are subject to change.
There is no income tax treaty in force between Chile and the United States.
HOLDERS OF ADS OR COMMON SHARES SHOULD CONSULT THEIR OWN TAX ADVISERS AS TO
THE CHILEAN, U.S. OR OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF ADS OR COMMON SHARES, INCLUDING, IN PARTICULAR, THE EFFECT OF ANY
FOREIGN, STATE OR LOCAL TAX LAWS.
Cash Dividends and Other Distributions
Cash dividends paid by us with respect to the ADS or Common Shares held by
a Foreign Holder will be subject to a 35% Chilean withholding tax, which is
withheld and paid over to the Chilean tax authorities by us (the "Withholding
Tax"). If we have paid corporate income tax (the "First Category Tax") on the
income from which the dividend is paid, a credit for the First Category Tax
effectively reduces the rate of Withholding Tax, though not on a one-for-one
basis because it also increases the base on which the Withholding Tax is
imposed. In addition, if we
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distribute less than all of our distributable income, the credit for First
Category Tax paid by us is proportionately reduced. It must be considered that
the First Category Tax rate for earnings from commercial year 1991 until 2001
was 15%, for the year 2002 was 16%, currently this year is 16.5% and for years
2004 and thereafter a rate of 17% will be applicable. Therefore, it is possible
that different rates of credits may be available for a single dividend.
When a credit is available, the Withholding Tax is computed by applying the
35% rate to the pre-tax amount needed to fund the dividend and then subtracting
from the tentative withholding tax so determined the amount of First Category
Tax actually paid on that pre-tax income. For purposes of determining the rate
at which First Category Tax was paid, dividends are treated as paid from our
oldest retained earnings.
The example below illustrates the effective Chilean Withholding Tax rate
burden on a cash dividend received by a Foreign Holder assuming a Withholding
Tax rate of 35%, an effective First-Category Tax rate of 16.5% and a
distribution of 30% of the consolidated net income of BBVA Banco BHIF
distributable after payment of the First Category Tax:
BBVA Chile...................................................... 100.0
First Category Tax (16.5% of CH$100)............................ (16.5)
Net distributable income........................................ 83.5
Dividend distributed (30% of net distributable income).......... 25.05
Withholding Tax (35% of the sum of CH$ 25.05 dividend
Plus CH4.95 First Category Tax paid)....................... (10.5)
Credit for 16.5% of First-Category Tax.......................... 4.95
Net additional tax withheld..................................... 5.55
Net dividend received........................................... 19.5
Effective dividend withholding rate............................. 22%
The effective Withholding Tax Rate, after giving effect to the credit for
the First Category Tax, can be calculated using the following formula:
(Withholding Tax rate) - (First Category Tax effective rate)
------------------------------------------------------------
1 - (First Category Tax effective rate)
The effective rate of Withholding Tax to be imposed on dividends paid by us
will vary depending upon the amount of First Category Tax paid by us on the
earnings to which the dividends are attributed.
The overall tax rate for the foreign (non-domiciled and non-resident)
investor is 35%.
As a result of the repayment of the Central Bank Subordinated Debt, we
realized a tax loss which was applied first against net income in 1996 and
second against certain retained earnings from prior years. The balance has been
carried forward to off-set 1998, 1999 and 2000 taxable income and the balance
thereof can be carried forward indefinitely. The consequence of application of
the tax loss against net income in 1998, 1999 and 2000 was that we did not pay
any First Category Tax in 1998, 1999 and 2000 and does not expect to pay such
Tax in future years until any remaining tax loss carry forward is fully
utilized. Thus, for 1998, 1999 and 2000 there was no First Category Tax credit
available to reduce the 35% Withholding Tax, and for such future years (or
portions thereof until any remaining tax loss carry forward is fully utilized)
there will be no First Category Tax credit available to reduce the 35%
Withholding Tax. See "Operating and Financial Review and Prospects--Results of
Operations for the Years Ended December 31, 1998, 1999 and 2000--Income Tax".
However, regardless of whether we pay any First-Category Tax, the total overall
Chilean tax burden imposed on our distributed profits will be 35%.
Any dividend distributions made in property (other than Common Shares) will
be subject to the same Chilean tax rules as cash dividends. Stock dividends are
not subject to Chilean taxation. The distribution and exercise of preemptive
rights relating to Common Shares will not be subject to Chilean taxation.
As is stipulated in number 8 of the Shareholders Agreement signed on
September 24, 1998 by BBVA Chile, (then BBV), Inversiones Caburga S.A. and other
shareholders, our policy on dividend distribution is defined as "to
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distribute every year at least 50% of the distributable net income from the
corresponding fiscal year". The distributable net income is the net income that
can be distributed according to law and regulations.
Capital Gains
Disposition of ADS
Gain realized on a sale or other disposition by a Foreign Holder of the ADS
will not be subject to Chilean taxation, provided that such sale or other
disposition occurs outside Chile and that such ADS are also located outside
Chile. The deposit and withdrawal of Common Shares in exchange for ADS will not
be subject to any Chilean taxes.
Disposition of Common Shares
Gain recognized on a sale or exchange of Common Shares (as distinguished
from sales or exchanges of ADS representing such Common Shares) will be subject
to Chilean income taxes at an effective rate of 35% if (i) the Foreign Holder
has held the Common Shares for less than one year since exchanging ADS for the
Common Shares, (ii) the Foreign Holder acquired and disposed of the Common
Shares in the ordinary course of its business or as a regular trader of shares
(i.e., the holder is "habitual in the purchase and sale of shares"), or (iii)
the Foreign Holder and the purchaser of the Common Shares are "related parties."
For this purpose, a "related party" is any entity in which the foreign holder is
(a) a partner, (b) a shareholder if such entity is a closed stock corporation,
or (c) a shareholder with more than 10% of the shares if such entity is an open
stock corporation. In all other cases (i.e., if the foreign holder is not
habitual and has held the shares for at least one year prior to their sale and
such sale was not made to a related party), gain on the disposition of Common
Shares will be subject only to a capital gains tax which is assessed at the same
rate as the First Category Tax (currently imposed at a rate of 16.0%) as a sole
tax.
For purposes of determining gain upon their sale, the tax basis of Common
Shares received in exchange for ADS will be the acquisition value of the Common
Shares on the date of the exchange, adjusted for the Chilean Consumer Price
Index (domestic inflation) variation between the month preceding the exchange
and the month preceding the sale. The valuation procedure set forth in the
Deposit Agreement, which values Common Shares which are being exchanged at the
highest reported sales price at which they trade on the Santiago Stock Exchange
on the date on which the exchange is recorded, will determine the acquisition
value for this purpose.
In case of conversion of ADS into Common Shares and the immediate sale of
such Common Shares, because of the mechanisms under which the Santiago Stock
Exchange operates, the sales price of the Common Shares is determined two days
prior to the date on which the exchange is recorded and the ownership transfer
of the Common Shares resulting from the exchange actually takes place.
Therefore, if the price of the Common Shares does not fluctuate within those two
days or goes up, no capital gain shall be generated. However, if the value of
the Common Shares on the Santiago Stock Exchange goes down within those two
days, a capital gain subject to taxation in Chile should be generated equal to
the difference between (i) the sales price determined two days prior to the date
the conversion of ADS into Common Shares is recorded, and (ii) the highest
reported sales price of the Common Shares on the Santiago Stock Exchange on such
recording date.
The above has been clarified by the Internal Revenue Service of Chile by
Ruling N(degree) 3708 of October 1, 1999 upon consultation by the Santiago Stock
Exchange. Such ruling also accepts (for the purposes of determining if capital
gains are generated) the amendment of the Deposit Agreement by the parties
thereto setting forth that the acquisition value of the Common Shares resulting
from an exchange of ADS should be the price registered in the relevant invoice
issued by the stock broker through whom the sale of such Common Shares took
place, provided, however, that such sales price is determined within no more
than two Santiago business days prior to the date on which the conversion of ADS
into Common Shares and the subsequent transfer of such Common Shares are
recorded.
Any gains on the sale or transfer of common shares will not be subject to
any Chilean tax, regardless of whether the seller performs such operations in a
regular basis or not. The gains obtained on the sale or transfer of common
shares which had presence at the stock exchange no more than 90 days prior to
the date of the operation, given that
116
the operation is carried at a Chilean stock exchange, at a foreign stock
exchange authorized by the regulating body of the country, or in a public
offering ruled by Title XXV of the Securities Market Law.
Disposition of preemptive rights
Amounts received in exchange for the sale or assignment of preemptive
rights relating to Common Shares will be subject to both the First Category Tax
and the Withholding Tax (the former being creditable against the latter to the
extent described above) as it is considered "normal" income and is taxed
accordingly.
Other Chilean Taxes
There are no Chilean inheritance, gift or succession taxes applicable to
the ownership, transfer or disposition of the ADS by a Foreign Holder, but such
taxes generally will apply to the transfer at death or by gift of Common Shares
by a Foreign Holder. There are no Chilean stamp, issue, registration or similar
taxes or duties payable by Foreign Holders of ADS or Common Shares.
Withholding Tax Certificates
Upon request, we will provide to Foreign Holders appropriate documentation
evidencing the payment of the Chilean Withholding Tax (net of applicable First
Category Tax).
U.S. Federal Income Tax Considerations
The following is a discussion of material U.S. federal income tax
consequences of purchasing, owning and disposing of Common Shares or ADSs, but
it does not purport to be a comprehensive description of all of the tax
considerations that may be relevant to a particular person's decision to acquire
such securities. The discussion applies only if you hold Common Shares or ADSs
as capital assets for tax purposes and it does not address special classes of
holders, such as:
o certain financial institutions;
o insurance companies;
o dealers and traders in securities or foreign currencies;
o persons holding Common Shares or ADSs as part of a hedge, straddle or
conversion transaction;
o persons whose functional currency for U.S. federal income tax purposes
is not the U.S. dollar;
o partnerships or other entities classified as partnerships for U.S.
federal income tax purposes;
o persons liable for the alternative minimum tax;
o tax-exempt organizations;
o persons holding Common Shares or ADSs that own or are deemed to own
more than ten percent of any class of our stock; or
o persons who acquired our ADSs or Common Shares pursuant to the
exercise of any employee stock option or otherwise as compensation.
This discussion is based on the Internal Revenue Code of 1986, as amended,
administrative pronouncements, judicial decision and final, temporary and
proposed Treasury regulations, all as currently in effect. These laws are
subject to change, possibly on a retroactive basis. It is also based in part on
representations by the Depositary and assumes that each obligation under the
Deposit Agreement and any related agreement will be performed in accordance with
its terms. Please consult your own tax advisers concerning the U.S. federal,
state, local and foreign
117
tax consequences of purchasing, owning and disposing of Common Shares or ADSs in
your particular circumstances.
The discussion below applies to you only if you are a beneficial owner of
Common Shares or ADSs and are, for U.S. federal tax purposes:
o a citizen or resident of the United States;
o a corporation, or other entity taxable as a corporation, created or
organized in or under the laws of the United States or any political
subdivision thereof; or
o an estate or trust the income of which is subject to U.S. federal
income taxation regardless of its source.
In general, if you hold ADSs, you will be treated as the holder of the
underlying shares represented by those ADSs for U.S. federal income tax
purposes. Accordingly, no gain or loss will be recognized if you exchange ADSs
for the underlying shares represented by those ADSs.
The U.S. Treasury has expressed concerns that parties to whom ADSs are
released may be taking actions that are inconsistent with the claiming of
foreign tax credits for United States holders of ADSs. Accordingly, the analysis
of the creditability of Chilean taxes described below could be affected by
future actions that may be taken by the U.S. Treasury.
Taxation of Distributions
Distributions paid on ADSs or Common Shares, other than certain pro rata
distributions of common shares, will be treated as a dividend to the extent paid
out of current or accumulated earnings and profits (as determined under United
States federal income tax principles). Under recently enacted legislation,
dividends received by noncorporate U.S. Holders on ADSs or Common Shares may be
subject to U.S. federal income tax at lower rates than other types of ordinary
income if certain conditions are met. You should consult your own tax advisers
regarding the implications of this new legislation in your particular
circumstances. The amount of the dividend will include any amounts withheld by
us or our paying agent in respect of Chilean taxes. The amount of the dividend
will be treated as foreign source dividend income to you and will not be
eligible for the dividends received deduction generally allowed to U.S.
corporations under the Code. Such dividends will constitute passive income for
foreign tax credit purposes.
Dividends paid in Chilean pesos will be included in your income in a U.S.
dollar amount calculated by reference to the exchange rate in effect on the date
of your (or in the case of ADSs, the depositary's) receipt of the dividend,
regardless of whether the payment is in fact converted into U.S. dollars. If the
dividend is converted into U.S. dollars on the date of receipt, you generally
should not be required to recognize foreign currency gain or loss in respect of
the dividend income. You may have foreign currency gain or loss if you do not
convert the amount of such dividend into U.S. dollars on the date of its
receipt.
Chilean taxes withheld from dividends on Common Shares or ADSs will be
creditable against your U.S. federal income tax liability, subject to applicable
limitations that may vary depending upon your circumstances. Instead of claiming
a credit, you may, at your election, deduct such Chilean taxes in computing your
taxable income, subject to generally applicable limitations under U.S. law. You
should consult your own tax advisers to determine whether you are subject to any
special rules that limit your ability to make effective use of foreign tax
credits.
Sale and Other Disposition of Common Shares or ADSs
For U.S. federal income tax purposes, gain or loss you realize on the sale
or other disposition of Common Shares or ADSs will be capital gain or loss, and
will be long-term capital gain or loss if you held the Common Shares or ADSs for
more than one year. The amount of your gain or loss will be equal to the
difference between your tax basis in the Common Shares or ADSs disposed of and
the amount realized on the disposition. Such gain or loss will generally be U.S.
source gain or loss for foreign tax credit purposes. Consequently, any Chilean
taxes
118
imposed on gain from Common Shares or ADSs (except for ADSs that are disposed of
outside of Chile) may not be creditable against your U.S. federal income tax
liability.
Passive Foreign Investment Company Rules
Based on proposed Treasury regulations, which are proposed to be effective
for taxable years after December 31, 1994, we believe that we will not be
considered a "passive foreign investment company" ("PFIC") for United States
federal income tax purposes for 2002. However, since PFIC status depends upon
the composition of a company's income and assets and the market value of its
assets (including, among others, less than 25 percent owned equity investments)
from time to time, there can be no assurance that we will not be considered a
PFIC for any taxable year. If we were treated as a PFIC for any taxable year
during which you held an ADS or a Common Share, certain adverse consequences
could apply to you.
If we are treated as a PFIC for any taxable year, gain recognized by you on
a sale or other disposition of an ADS or Common Share would be allocated ratably
over your holding period for the ADS or Common Share. The amounts allocated to
the taxable year of the sale or other exchange and to any year before the
Company became a PFIC would be taxed as ordinary income. The amount allocated to
each other taxable year would be subject to tax at the highest rate in effect
for individuals or corporations, as appropriate, and an interest charge would be
imposed on the amount allocated to such taxable year. Further, any distribution
in respect of ADSs or Common Shares in excess of 125 percent of the average of
the annual distributions on ADSs or Common Shares received by you during the
preceding three years or your holding period, whichever if shorter, would be
subject to taxation as described above. Certain elections (including a mark to
market election) may be available to you that may mitigate the adverse
consequences of PFIC status.
Information Reporting and Backup Withholding
Payment of dividends and sales proceeds that are made within the United
States or through certain U.S.-related financial intermediaries generally are
subject to information reporting and to backup withholding unless (i) you are a
corporation or other exempt recipient, or (ii) you provide a correct taxpayer
identification number and certify that you are not subject to backup
withholding.
The amount of any backup withholding from a payment to you will be allowed
as a credit against your United States federal income tax liability and may
entitle you to a refund, provided that the required information is furnished to
the Internal Revenue Service.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Expert
Not applicable.
H. Documents on Display
We file annual and special reports and other information with the SEC. You
may read and copy any document we file at the Public Reference Room o the SEC at
450 Fifth Street, N.W., Washington, DC 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You
may also inspect our filings at the regional offices of the SEC located at
Citicorp, 500 West Madison, Suite 1400, Chicago, Illinois 60661. You may request
a copy of these filings by writing or telephoning the offices of BBVA in New
York, 1345 Avenue of the Americas, 45th Floor, New York, NY 10105. BBVA's
telephone number is (212) 728-1660.
119
Item 11. Quantitative and Qualitative Disclosures About Market Risk
General
Through our normal operations, we are exposed to a number of risks, the
most significant of which are market risk, liquidity risk, credit risk and
operational risk. Management of these risks is a process which involves
different levels of our organization and covers a wide range of policies. The
extent to which we properly and effectively identify and manage our risk is
critical to our profitability. Risk management seeks to optimize the
relationship between risk and reward and to limit the possible maximum absolute
loss. For a discussion of our risk management policies and Chilean regulation on
managing market risk in the banking sector, see "Business Overview-Chilean
Regulation and Supervision", "Business Overview-Selected Statistical
Information" and "Operating and Financial Review and Prospects-Asset and
Liability Management".
Market Risk
Market risk is the risk that changes in interest rates, currency exchange
or bond prices will have an adverse impact on our earnings, cash flows or the
fair values of our assets, liabilities or off-balance sheet positions. We are
exposed to market risk in both our trading and non-trading activities.
Trading Risk
The estimation of potential losses that could arise from reasonably likely
adverse changes in market conditions is the key element of managing market risk.
As of 2002 we have installed institutional tools that enable us to use the value
at risk methodology ("VAR"). VAR is an estimate (made with a given confidence
interval) of the maximum potential loss in the fair or market value of a certain
instrument or portfolio likely to occur over a specified time period, or "time
horizon," if that portfolio were held unchanged for that time period. This
methodology is based on statistical methods that take into account numerous
variables that may cause a change in the value of BBVA Chile's portfolios,
including interest rates, foreign exchange rates, securities prices and
volatility and any correlations among the foregoing.
Additionally, we are involved in a continuous process of improvement of our
systems, in order to adapt them to the latest methodological advances in market
risks measurement and control.
Our VAR estimates provide us with a consistent and uniform measure of
market risk in our trading portfolios. VAR uses historical movements in these
variables to estimate reasonably likely potential losses in trading activities
assuming normal market conditions and market liquidity. The historical
observation involves constructing a distribution of hypothetical daily changes
in trading portfolio value. These hypothetical changes are based on daily
observed percentage changes in key market indices or other market factors to
which the portfolio may be sensitive. Our VAR analysis is updated regularly by
recalculating the historic volatilities and correlations that serve as the basis
for this analysis. In the case of our VAR analysis, the period for estimating
risk factors is approximately two years and we assume a one-day holding period
and adverse market movements of 2.33 standard deviations as the standard for
risk measurement and comparison. This range approximates a 99% one-tailed
confidence interval. For a given portfolio, this implies that changes in market
value are statistically likely to deviate adversely from VAR estimates
approximately 1% of the time or one day out of 100 days. The volatility and
correlation used in the calculation process are obtained by the technique known
as "exponential smooth," which confers a higher relative weight to the last
historical data considered within the one-year series.
We use VAR as a tool to estimate and limit market risks related to all of
our trading activities. Two types of limits will be used to seek to control
market risk arising from our trading activities: limits based on VAR and
stop-loss. Currently the limit based on VAR is at $1,800 million (US$2.5
million). Limits on particular portfolios, products and individual traders are
established within each business. The VAR model incorporates numerous variables
that could impact the fair value of our trading portfolio, as well as
correlations that exist among these variables. It takes into account linear and
non-linear exposures to price and interest rate risk and linear exposure to
implied volatility risks.
120
Non-Trading Risk
Our principal non-trading market risks are interest rate, foreign exchange
and equity price risk.
Interest Rate Risk. Interest rate risk arises as a result of timing
differences on the re-pricing of the assets and liabilities, unexpected changes
in the slope and shape of yield curves and changes in correlation of interest
rates between different financial instruments. Exposure to interest rate
movements arises when there is a mismatch between interest rate sensitive assets
and liabilities.
Currency Risk. Currency risk arises as a result of our having assets,
liabilities and off-balance sheet items that are denominated in currencies other
than Chilean pesos and Unidades de Fomento, either as a result of trading or in
the normal course of banking activities including investments. The most
significant currency in which we have transactions is the U.S. dollar. Exposure
to exchange rate movements is controlled by ensuring that mismatches are managed
and monitored by individual business divisions.
For a discussion of our trading and non-trading interest rate risk, foreign
currency risk and market price risk of our bonds portfolio, see "Operating and
Financial Review and Prospects-Asset and Liability Management" and "Business
Overview-Selected Statistical Information".
Liquidity Risk
Liquidity risk is the risk that we might be unable to meet payment
obligations and potential payment obligations when they fall due without
incurring unacceptable losses and that asset commitments cannot be funded on an
economic basis over their life. Liquidity management seeks to ensure that we
have access to funds necessary to cover client needs, maturing liabilities and
capital requirements, even under adverse market conditions. See "Operating and
Financial Review and Prospects-Asset and Liability Management-Liquidity and
Funding".
Credit Risk
We have drawn up a system to measure credit risk both at the level of
operation as well as the level of the whole loan portfolio. For a discussion of
our credit risk, see "Business Overview--Selected Statistical Information".
Operational Risk
Operational risk can result from any of the following: failures to obtain
proper internal authorizations, failure to properly document transactions,
equipment failures, fraud, inadequate training or errors by employees. Losses
that are characterized as operational include, but are not limited to the
following examples: losses due to a failure of internal controls, personnel
unavailability or injury and external events including natural disasters or the
failure of external systems. We manage these risks with internal rules based on
tolerance limits for operational failures set by management. Legal risk includes
the possibility that transactions may not be enforceable under applicable law or
regulation and also the possibility that changes in law or regulation could
adversely affect our position. The risk is greater with respect to derivative
financial instruments, as applicable law and regulation is relatively recent and
in some cases incomplete. We manage legal risk by seeking to ensure that
transactions are properly authorized and by submitting new or unusual
transactions to our legal advisors for review.
Item 12. Description of Securities Other than Equity Securities
Not applicable.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
121
Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds
None.
Item 15. Controls and Procedures
Within the 90 day period prior to the filing of this report, we have
carried out an evaluation of the effectiveness of the design and operation of
the Bank's disclosure controls and procedures, which are defined as those
controls and procedures designed to ensure that information required to be
disclosed in reports filed under the Exchange Act is correctly recorded,
summarized and reported. As of the date of the evaluation, we have concluded
that the design and operation of these disclosure controls and procedures were
effective. No significant changes were made in our internal controls or in other
factors that could significantly affect these controls subsequent to the
evaluation.
Item 16A. Audit Committee Financial Expert
Not yet applicable.
Item 16B. Code of Ethics
Not yet applicable.
PART III
Item 17. Financial Statements
Our financial statements have been prepared in accordance with item 18
hereof.
Item 18. Financial Statements
Reference is made to item 19 for a list of all financial statements filed
as a part of this Form 20F.
Item 19. Exhibits
(a) Index to Financial Statements and Schedules
Report of independent accountants Audited consolidated financial
statements:
Consolidated balance sheets at December 31, 2001 and 2002 Consolidated
statements of income for each of the three years in the
period ended December 31, 2002
Consolidated statements of cash flows for each of the three years in the
period ended December 31, 2002
Consolidated statements of shareholders' equity
for each of the three years in the period ended December 31, 2002
Notes to the consolidated financial statements
(b) Index to Exhibits
122
1.1* Estatutos of Registrant, which serve as the Registrant's articles of
incorporation and by-laws, together with an English translation.
1.2** English translation of amendments to Estatutos of Registrant.
4.1*** Shareholders Agreement dated September 24, 1998
8.1**** List of Subsidiaries of BBVA Chile
12.1***** Section 906 certification
- --------
* Incorporated by reference to our Registration Statement No. 333-4918 on
Form F-1 filed with the Commission on June 17, 1996.
** Incorporated by reference to our annual report on Form 20-F filed with the
Commission on May 31, 1999.
*** Incorporated by reference to our Annual Report on Form 20-F for the fiscal
year ended December 31, 1999.
**** Incorporated by reference to our Annual Report on Form 20-F from the
fiscal year ended December 31, 2002.
***** Filed herewith.
123
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Annual Report on Form 20-F to be
signed on its behalf by the undersigned, thereunto duly authorized, in Santiago,
Chile on June 30, 2003.
Banco Bilbao Vizcaya Argentaria, Chile S.A.
By: /s/ Ramon Monell Valls
-------------------------------------
Name: Ramon Monell Valls
Title: Gerente General (CEO)
Dated: June 30, 2003
124
CERTIFICATIONS
I, Ramon Monell Valls, certify that:
1. I have reviewed this annual report on Form 20-F of Banco Bilbao Vizcaya
Argentaria, Chile S.A.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material factor omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a- 14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: June 26, 2003
/s/ Ramon Monell Valls
- -------------------------
Gerente General (CEO)
- ---------------------
125
CERTIFICATIONS
I, Salvador Milan Alcaraz, certify that:
1. I have reviewed this annual report on Form 20-F of Banco Bilbao Vizcaya
Argentaria, Chile S.A.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material factor omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a- 14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: June 26, 2003
/s/ Salvador Milan Alcaraz
- ---------------------------
Director Financiero (CFO)
126
BBVA BANCO BHIF
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Page
----
Report of independent accountants F-2
Audited consolidated financial statements:
Consolidated balance sheets at December 31, 2001 and 2002 F-4
Consolidated statements of income for each of the three years in the
period ended December 31, 2002 F-6
Consolidated statements of cash flows for each of the three years
in the period ended December 31, 2002 F-7
Consolidated statements of shareholders' equity
for each of the three years in the period ended December 31, 2002 F-8
Notes to the consolidated financial statements F-9
Ch$ - Chilean pesos
MCh$ - Millions of Chilean pesos
US$ - United States dollars
ThUS$ - Thousands of United States dollars
UF - A UF is a daily-indexed, peso-denominated monetary unit. The UF
rate is set daily in advance based on the previous month's
inflation rate.
Applications of Constant Pesos
The above December 31, 2000, 2001 and 2002 consolidated financial statements
have been restated for general price-level changes and expressed in constant
Chilean pesos of December 31, 2002 purchasing power.
F - 1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
BBVA Banco BHIF
We have audited the accompanying consolidated balance sheets of BBVA Banco
BHIF and its subsidiaries (the "Bank") as of December 31, 2001 and 2002 and the
related consolidated statements of income, of cash flows and of shareholders'
equity for each of the three years in the period ended December 31, 2002, all
expressed in millions of constant Chilean pesos. These financial statements are
the responsibility of the Bank's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in both Chile and the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of BBVA Banco BHIF and its
subsidiaries as of December 31, 2001 and 2002 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in Chile and the rules of the regulatory agencies referred to in Note 1.
F - 2
To the Board of Directors and Shareholders of
BBVA Banco BHIF
2
As described in Note 2, during the year ended December 31, 2002 the Bank
modified the accounting treatment of investments in mortgage finance bonds
issued by the Bank.
Accounting principles generally accepted in Chile vary in certain
important respects from accounting principles generally accepted in the United
States of America and as allowed by Item 18 to Form 20 - F. The application of
the latter would have affected the determination of net income expressed in
Chilean pesos for each of the three years in the period ended December 31, 2002
and the determination of shareholders' equity and financial position also
expressed in Chilean pesos at December 31, 2001 and 2002 to the extent
summarized in Note 28 to the financial statements. The presentation of
financial statements for banks prepared in accordance with the requirements of
the Chilean regulatory authorities also differs significantly from the format
required by the United States Securities and Exchange Commission ("SEC").
Consolidated balance sheets at December 31, 2001 and 2002 and consolidated
statements of income for each of the three years in the period ended December
31, 2002, prepared in accordance with accounting principles generally accepted
in Chile, but using the format for bank financial statements specified by the
SEC, are shown in Note 27 to the financial statements.
/s/ PricewaterhouseCooper
Santiago, Chile
January 16, 2003
F - 3
BBVA BANCO BHIF
CONSOLIDATED BALANCE SHEETS
Adjusted for general price-level changes and expressed
in millions of constant Chilean pesos (MCh$) of
December 31, 2002 and thousands of US dollars (ThUS$)
At December 31,
--------------------------------------
ASSETS 2001 2002 2002
------ ---------- ---------- ----------
MCh$ MCh$ ThUS$
Unaudited
(Note 1 o)
CASH AND DUE FROM BANKS
Non-interest bearing (Note 3) .............................. 145,973 284,463 399,314
Interest bearing ........................................... 59,137 26,560 37,283
---------- ---------- ----------
Total cash and due from banks ........................ 205,110 311,023 436,597
---------- ---------- ----------
INVESTMENTS (Note 4)
Government securities ...................................... 187,653 287,787 403,980
Investments purchased under agreements to resell ........... 9,579 56,055 78,687
Investment collateral under agreements to repurchase ....... 169,100 220,281 309,218
Other investments .......................................... 23,934 81,757 114,766
---------- ---------- ----------
Total investments .................................... 390,266 645,880 906,651
---------- ---------- ----------
LOANS, NET (Note 6)
Commercial loans ........................................... 819,362 828,522 1,163,034
Consumer loans ............................................. 176,114 204,589 287,191
Mortgage loans ............................................. 241,456 253,489 355,834
Foreign trade loans ........................................ 148,856 233,522 327,805
Interbank loans ............................................ 1,033 - -
Lease contracts (Note 7) ................................... 66,013 83,731 117,537
Other outstanding loans .................................... 282,488 368,690 517,547
Past due loans ............................................. 38,653 41,330 58,017
Contingent loans ........................................... 67,184 84,691 118,885
Allowance for loan losses (Note 8) ......................... (43,264) (45,045) (63,232)
---------- ---------- ----------
Total loans, net ..................................... 1,797,895 2,053,519 2,882,618
---------- ---------- ----------
OTHER ASSETS
Assets received in lieu of payment ......................... 8,918 15,446 21,682
Bank premises and equipment (Note 9) ....................... 57,566 55,668 78,144
Investments in other companies (Note 10) ................... 1,083 1,159 1,627
Other (Note 11a) ........................................... 83,023 113,509 159,338
---------- ---------- ----------
Total other assets ................................... 150,590 185,782 260,791
---------- ---------- ----------
Total assets ......................................... 2,543,861 3,196,204 4,486,657
========== ========== ==========
The accompanying Notes 1 to 28 form an integral part of these consolidated
financial statements.
F - 4
BBVA BANCO BHIF
CONSOLIDATED BALANCE SHEETS
Adjusted for general price-level changes and expressed
in millions of constant Chilean pesos (MCh$) of
December 31, 2002 and thousands of US dollars (ThUS$)
At December 31,
---------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2002 2002
------------------------------------ ----------- ----------- -----------
MCh$ MCh$ ThUS$
Unaudited
(Note 1 o)
DEPOSITS
Non-interest bearing
Current accounts ..................................... 178,525 224,790 315,548
Banker's drafts and other deposits ................... 143,986 233,011 327,088
----------- ----------- -----------
Total non-interest bearing ....................... 322,511 457,801 642,636
----------- ----------- -----------
Interest bearing
Saving accounts and time deposits .................... 1,102,821 1,454,684 2,042,005
----------- ----------- -----------
Total deposits ................................... 1,425,332 1,912,485 2,684,641
----------- ----------- -----------
BORROWINGS (Note 12)
Central Bank borrowings ................................. 11,646 8,841 12,411
Securities sold under agreements to repurchase .......... 172,624 255,565 358,748
Mortgage finance bonds .................................. 239,816 250,999 352,339
Other borrowings:
Subordinated bonds ................................... 31,904 31,607 44,368
Other bonds .......................................... 43,884 39,725 55,764
Borrowings from domestic financial institutions ...... 65,142 68,934 96,766
Foreign borrowings ................................... 127,468 175,045 245,719
Other obligations .................................... 40,472 37,980 53,314
----------- ----------- -----------
Total borrowings ................................. 732,956 868,696 1,219,429
----------- ----------- -----------
OTHER LIABILITIES
Contingent liabilities (Note 11 c) ...................... 67,117 85,457 119,960
Other (Note 11 b) ....................................... 68,248 72,431 101,674
----------- ----------- -----------
Total other liabilities .......................... 135,365 157,888 221,634
----------- ----------- -----------
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES ............................................... 88 113 159
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 15)
SHAREHOLDERS' EQUITY (Note 13)
Capital ................................................. 151,877 151,877 213,197
Reserves ................................................ 82,908 84,890 119,164
Net income for the year ................................. 15,335 20,255 28,433
----------- ----------- -----------
Total shareholders' equity ....................... 250,120 257,022 360,794
----------- ----------- -----------
Total liabilities and shareholders' equity ....... 2,543,861 3,196,204 4,486,657
=========== =========== ===========
The accompanying Notes 1 to 28 form an integral part of these consolidated
financial statements.
F - 5
BBVA BANCO BHIF
CONSOLIDATED STATEMENTS OF INCOME
Expressed in millions of constant Chilean pesos (MCh$) of
December 31, 2002 and thousands of US dollars (ThUS$)
Year ended December 31,
----------------------------------------------------
2000 2001 2002 2002
---------- ---------- ---------- ----------
MCh$ MCh$ MCh$ ThUS$
Unaudited
(Note 1 o)
INTEREST REVENUE AND EXPENSE
Interest revenue ............................................ 225,990 218,194 216,464 303,860
Interest expense ............................................ (145,911) (124,852) (107,450) (150,832)
---------- ---------- ---------- ----------
Net interest revenue .................................. 80,079 93,342 109,014 153,028
---------- ---------- ---------- ----------
PROVISION FOR LOAN LOSSES (Note 8) ................................ (24,459) (31,556) (31,316) (43,960)
---------- ---------- ---------- ----------
INCOME FROM SERVICES, NET (Note 18)
Income from services ........................................ 16,635 22,282 26,334 36,966
Services expenses ........................................... (4,840) (5,054) (4,572) (6,418)
---------- ---------- ---------- ----------
Income from services, net ............................. 11,795 17,228 21,762 30,548
---------- ---------- ---------- ----------
OTHER OPERATING INCOME, NET
Gains on financial instruments (Note 19) ................... 4,704 11,640 13,101 18,390
Losses on financial instruments (Note 19) ................... (753) (3,086) (6,961) (9,771)
Foreign exchange transactions, net .......................... 1,377 (4,162) (14,335) (20,123)
---------- ---------- ---------- ----------
Total other operating income, net ..................... 5,328 4,392 (8,195) (11,504)
---------- ---------- ---------- ----------
OTHER INCOME AND EXPENSES
Recovery of loans previously charged-off (Note 20) .......... 7,674 7,500 9,696 13,611
Non operating income (Note 21) .............................. 2,866 3,948 4,776 6,704
Non operating expenses (Note 21) ............................ (2,845) (2,821) (3,723) (5,226)
Participation in earnings (losses) of equity investments .... (36) (34) 116 163
---------- ---------- ---------- ----------
Total other income and expenses ....................... 7,659 8,593 10,865 15,252
---------- ---------- ---------- ----------
OPERATING EXPENSES
Personnel salaries and expenses ............................. (28,555) (33,099) (33,118) (46,489)
Administrative and other expenses ........................... (26,676) (28,143) (29,049) (40,777)
Depreciation and amortization ............................... (6,843) (10,053) (12,992) (18,237)
---------- ---------- ---------- ----------
Total operating expenses .............................. (62,074) (71,295) (75,159) (105,503)
---------- ---------- ---------- ----------
LOSS FROM PRICE-LEVEL RESTATEMENT (Note 22) ....................... (5,388) (4,464) (4,164) (5,845)
---------- ---------- ---------- ----------
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES ................................................... (20) (24) (34) (48)
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES ....................................... 12,920 16,216 22,773 31,968
Income taxes (Note 23) ...................................... 1,984 (881) (2,518) (3,535)
---------- ---------- ---------- ----------
Net income for the year ............................... 14,904 15,335 20,255 28,433
========== ========== ========== ==========
The accompanying Notes 1 to 28 form an integral part of these consolidated
financial statements.
F - 6
BBVA BANCO BHIF
CONSOLIDATED STATEMENTS OF CASH FLOWS
Expressed in millions of constant Chilean pesos (MCh$) of
December 31, 2002 and thousands of US dollars (ThUS$)
Year ended December 31,
------------------------------------------------
2000 2001 2002 2002
--------- --------- --------- ---------
MCh$ MCh$ MCh$ ThUS$
Unaudited
(Note 1 o)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................................................. 14,904 15,335 20,255 28,433
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ............................................ 6,843 10,053 12,992 18,237
Provision for loan losses ................................................ 24,459 31,556 31,316 43,960
Provision for assets received in lieu of payment ......................... 746 1,027 678 952
Net change in trading investments ........................................ (190,194) 150,079 (11,314) (15,882)
Minority interest in earnings of subsidiaries ............................ 20 24 34 48
Net gain (loss) on sales of bank premises and equipment .................. 2 (161) (7) (10)
Net gain on sales of assets received in lieu of payment and leasing assets (706) (314) (407) (571)
Recovery of assets received in lieu of payment previously charged - off .. (685) (775) (806) (1,131)
Write-offs of assets received in lieu of payment ......................... 1,048 540 1,405 1,972
Price-level restatements ................................................. 5,388 4,464 4,164 5,845
Deferred income taxes .................................................... (2,999) (5,254) (3,743) (5,254)
Other charges (credits) non representing cash flows ...................... (174) 1,872 2,138 3,001
Net change in interest accruals .......................................... (822) 3,410 (5,795) (8,139)
Net change in other assets and liabilities ............................... 12,194 5,629 (18,282) (25,663)
--------- --------- --------- ---------
Net cash provided by (used in) operating activities ................ (129,976) 217,485 32,628 45,798
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans ....................................................... (252,729) (187,304) (351,873) (493,940)
Purchases of investments .................................................... (29,074) (114,909) (318,427) (446,990)
Proceeds from sales of investments .......................................... 49,110 49,196 140,224 196,839
Dividends received from investments in other companies ..................... 91 89 50 70
Additional investments in other companies ................................... (55) (362) (15) (22)
Proceeds from sales of bank premises and equipment .......................... 103 1,849 108 152
Purchases of bank premises and equipment .................................... (11,590) (8,368) (4,920) (6,907)
Proceeds from sales of assets received in lieu of payment ................... 4,847 4,179 4,767 6,692
--------- --------- --------- ---------
Net cash used in investing activities .............................. (239,297) (255,630) (530,086) (744,106)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in current accounts ............................................ 3,047 33,258 46,261 64,939
Net increase in savings accounts and time deposits .......................... 61,608 166,954 347,765 488,173
Net increase (decrease) in banker's drafts and other deposits ............... 33,958 (137) 90,610 127,194
Net increase (decrease) in securities sold under agreements to repurchase ... 120,092 (85,270) 83,084 116,629
Proceeds from issuance of mortgage finance bonds ............................ 11,623 44,026 76,339 107,160
Repayment of mortgage finance bonds ......................................... (28,526) (40,536) (58,046) (81,481)
Proceeds from Central Bank borrowings (long-term) ........................... 8,977 - - -
Repayments of Central Bank borrowings (long-term) ........................... (10,235) (3,114) (2,827) (3,968)
Net increase (decrease) in other short-term borrowings ...................... 124,520 (17,432) 13,843 19,431
Proceeds from bond issues ................................................... 22,550 - - -
Repayment of bonds .......................................................... (6,359) (3,966) (4,485) (6,295)
Proceeds from other long-term borrowings .................................... 13,900 22,362 134,779 189,196
Repayment of other long-term borrowings ..................................... (18,222) (14,332) (100,819) (141,524)
Proceeds from issuance of shares ............................................ 64,785 - - -
Dividends paid .............................................................. (9,519) (15,636) (14,930) (20,958)
--------- --------- --------- ---------
Net cash provided by financing activities .......................... 392,199 86,177 611,574 858,496
--------- --------- --------- ---------
NET INCREASE IN CASH AND DUE FROM BANKS ........................................ 22,926 48,032 114,116 160,188
EFFECT OF INFLATION ON CASH AND CASH EQUIVALENTS ............................... (10,308) (7,421) (8,203) (11,513)
CASH AND DUE FROM BANKS, BEGINNING OF YEAR ..................................... 151,881 164,499 205,110 287,921
--------- --------- --------- ---------
CASH AND DUE FROM BANKS, END OF YEAR ........................................... 164,499 205,110 311,023 436,596
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for:
Interest ................................................................. 129,032 58,303 30,706 43,104
Income taxes paid ........................................................ 83 4,808 (420) (589)
The accompanying Notes 1 to 28 form an integral part of these consolidated
financial statements.
F - 7
BBVA BANCO BHIF
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Expressed in millions of constant Chilean pesos (MCh$) of December 31, 2002
(except for number of shares)
Number
of shares Net
issued and income for
fully paid Capital Reserves the year Total
----------- --------- --------- --------- ---------
MCh$ MCh$ MCh$ MCh$
Balances at January 1, 2000 (historical) ............. 290,106,412 106,550 46,364 8,653 161,567
Dividend paid ........................................ - - - (8,653) (8,653)
Issuance of common shares ............................ 71,115,615 30,967 29,830 - 60,797
Share issuance costs ................................. - - (751) - (751)
Market value adjustments of available
for sale securities ................................ - - 508 - 508
Price-level restatement .............................. - 5,503 2,780 - 8,283
Net income for the year .............................. - - - 14,035 14,035
----------- --------- --------- --------- ---------
Balances at December 31, 2000 ........................ 361,222,027 143,020 78,731 14,035 235,786
=========== ========= ========= ========= =========
Balance at December 31, 2000 restated in constant
Chilean pesos of December 31, 2002 .................. 151,877 83,608 14,904 250,389
========= ========= ========= =========
Balances at January 1, 2001 (historical) ............. 361,222,027 143,020 78,731 14,035 235,786
Capitalization of undistributed earnings ............. - - 2 (2) -
Dividend paid ........................................ - - - (14,033) (14,033)
Market value adjustments of available for
sale securities .................................... - - (720) - (720)
Price-level restatement .............................. - 4,434 2,480 - 6,914
Net income for the year .............................. - - - 14,888 14,888
----------- --------- --------- --------- ---------
Balances at December 31, 2001 ........................ 361,222,027 147,454 80,493 14,888 242,835
=========== ========= ========= ========= =========
Balance at December 31, 2001 restated in constant
Chilean pesos of December 31, 2002 .................. 151,877 82,908 15,335 250,120
========= ========= ========= =========
Balances at January 1, 2002 (historical) ............. 361,222,027 147,454 80,493 14,888 242,835
Capitalization of undistributed earnings ............. - - 2 (2) -
Dividend paid ........................................ - - - (14,886) (14,886)
Market value adjustments of available for
sale securities .................................... - - 1,918 - 1,918
Price-level restatement .............................. - 4,423 2,477 - 6,900
Net income for the year .............................. - - - 20,255 20,255
----------- --------- --------- --------- ---------
Balances at December 31, 2002 ........................ 361,222,027 151,877 84,890 20,255 257,022
=========== ========= ========= ========= =========
The accompanying Notes 1 to 28 form an integral part of these consolidated
financial statements.
F - 8
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Expressed in millions of constant Chilean pesos (MCh$)
of December 31, 2002 (except as indicated)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
a) Basis of presentation
BBVA Banco BHIF is a corporation organized under the laws of the Republic
of Chile whose stock is quoted on the Santiago Stock Exchange and the Chilean
Electronic Exchange and whose American Depositary Receipts ("ADR") are quoted
on the New York Stock Exchange (NYSE). It is regulated by the Chilean
Superintendencia de Bancos e Instituciones Financieras ("Superintendency of
Banks") and the United States Securities and Exchange Commission ("SEC").
BBVA Banco BHIF provides a broad range of general banking services to
customers ranging from individuals to major corporations. BBVA Banco BHIF and
its subsidiaries (collectively the "Bank"), offer general commercial and
consumer banking services. The Bank's subsidiaries provide other services to
customers in Chile including securities and insurance brokerage, mutual fund
management, investment fund management, residential housing fund management and
financial advisory services.
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Chile and regulations of the
Superintendency of Banks (in the case of the bank and its residential housing
leasing and financial advisory services subsidiaries) and the Chilean
Superintendency of Securities and Insurance (in the case of the securities
brokerage and mutual fund, investment residential housing fund management and
insurance brokerage subsidiaries).
The consolidated financial statements include BBVA Banco BHIF and its
majority-owned subsidiaries. The accounts of subsidiaries are included when the
Bank's ownership interest exceeds 50%. All significant intercompany
transactions and balances have been eliminated in consolidation. The
participation of minority shareholders in subsidiaries has been given effect in
the consolidated financial statements under Minority interest.
The consolidated financial statements for the years 2000, 2001 and 2002
include the following subsidiaries:
Percentage of ownership
----------------------------
2000 2001 2002
---- ---- ----
% % %
BBVA Corredores de Bolsa BHIF S.A. ................... 100.00 99.96 100.00
BHIF Administradora de Fondos de Inversion S.A. ....... 100.00 100.00 100.00
BHIF Administradora de Fondos para la Vivienda S.A. ... 100.00 100.00 100.00
BBVA Sociedad de Leasing Inmobiliario BHIF S.A. ....... 97.17 97.17 97.48
BHIF Asesorias y Servicios Financieros S.A. ........... 98.60 98.60 98.60
BBVA Administradora de Fondos Mutuos BHIF S.A. ........ 100.00 100.00 100.00
BBVA Corredora Tecnica de Seguros BHIF Ltda ........... 100.00 100.00 100.00
F - 9
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
b) Use of estimates in the preparation of financial statements
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
In certain cases generally accepted accounting principles require that
assets or liabilities be recorded or disclosed at their fair values. The fair
value is the amount at which an asset could be bought or sold or in the case of
a liability could be incurred or settled in a current transaction between
willing parties, other than in a forced or liquidation sale. Where available
quoted market prices in active markets have been used as the basis for the
measurement, however, where quoted market prices in active markets are not
available the Bank has estimated such values based on the best information
available, including using modeling and other valuation techniques.
c) Price-level restatements
The consolidated financial statements are prepared on the basis of general
price-level accounting in order to reflect the effect of changes in the
purchasing power of the Chilean peso during each year. At the end of each
reporting period, the consolidated financial statements are restated in terms
of the general purchasing power of the Chilean peso using changes in the
Chilean consumer price index ("CPI") as follows:
- - Non monetary assets, liabilities and shareholders' equity accounts are
restated in terms of year-end purchasing power.
- - Consistent with general banking practices in Chile, no specific purchasing
power adjustments of income statement amounts are made.
- - Monetary items are not restated as such items are, by their nature, stated
in terms of current purchasing power in the financial statements.
- - The price-level restatement credit or charge in the income statement
represents the monetary gain or loss in purchasing power from holding
monetary assets and liabilities exposed to the effects of inflation.
- - All the amounts contained in the accompanying consolidated financial
statements have been restated in Chilean pesos of general purchasing power
of December 31, 2002 ("constant pesos") applied under the "prior month
rule", as described below, to reflect changes in the CPI from the
financial statement dates to December 31, 2002. This updating does not
change the prior years' statements or information in any way except to
update the amounts to constant pesos of similar purchasing power.
The general price-level restatements are calculated using the official CPI
of the Chilean National Institute of Statistics and are based on the "prior
month rule", in which the inflation adjustments at any balance sheet date are
based on the consumer price index at the close of the preceding month. The CPI
is considered by the business community, the accounting profession and the
Chilean government to be the index which most closely complies with the
technical requirement to reflect the variation in the general level of prices
in the country and, consequently, is widely used for financial reporting
purposes in Chile.
F - 10
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The values of the CPI used for price-level restatement purposes are as follows:
Year-end
Year CPI* Change in CPI
- ---- ---- -------------
%
2000 ........................ 106.82 ................. 4.7
2001 ........................ 110.10 ................. 3.1
2002 ........................ 113.36 ................. 3.0
* Index as of November 30 of each year, under the prior month rule described
above.
The price-level adjusted consolidated financial statements do not purport
to represent appraised values, replacement cost, or any other current value of
assets at which transactions would take place currently and are only intended
to restate all non monetary financial statement components in terms of local
currency of a single purchasing power and to include in the net result for each
year the gain or loss in purchasing power arising from the holding of monetary
assets and liabilities exposed to the effects of inflation.
For comparison purposes, the financial statements and their respective
notes are adjusted by the percentage changes in the CPI to December 31, 2002 as
follows:
Year Adjustment factor
- ---- -----------------
2000.................................................. 6.1 (1)
2001.................................................. 3.0
(1) Equivalent to the amounts for 2000, multiplied by the change in the CPI
for 2001 and then by the change in the CPI for 2002.
d) Index-linked assets and liabilities
Certain of the Bank's interest-earning assets and interest-bearing
liabilities are expressed in index-linked units of account. The principal
index-linked unit used in Chile is the Unidad de Fomento (UF), a unit of
account which changes daily from the ninth day of the current month to the
tenth day of the next month, to reflect the changes in the Chilean CPI over the
previous month. The carrying amounts of such assets and liabilities change with
the changes in the UF and serve to offset the price-level restatement gains or
losses from holding such assets and liabilities. As the Bank's UF assets exceed
its UF liabilities, any increase in the index results in a net gain on
indexation. Values for the UF as of December 31 of each year are as follows in
historical Chilean pesos:
Year Ch$
- ---- ---
2000......................................................... 15,769.92
2001......................................................... 16,262.66
2002......................................................... 16,744.12
F - 11
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
e) Interest revenue and expense recognition
Interest revenue and expense are recognized on the accrual basis using the
effective interest method. The carrying amounts of loans, investments and
liabilities include accrued interest and the indexation adjustment applicable
to balances that are denominated in UFs or other indices. The effect of changes
in the UF index on interest-earning assets and interest-bearing liabilities is
reflected in the income statement as an increase or decrease in interest
revenue or expense.
The Bank suspends the accrual of interest and indexation adjustment of
principal on loans beginning on the first day that such loans are overdue and
on amounts not yet due for loans on which any installments of principal or
interest are 90 days overdue. Interest accrued prior to the loan becoming
overdue remains on the Bank's books and is considered to be a part of the loan
balance when determining the allowance for loan losses. Payments received on
overdue loans are first applied to reduce the recorded balance of accrued
interest receivable, if any, and thereafter are recognized as income to the
extent of interest earned but not recorded.
f) Assets and liabilities in foreign currency and foreign currency
transactions
The Bank makes loans and accepts deposits in amounts denominated in
foreign currencies, principally the US dollar. Such assets and liabilities are
translated at the applicable rate of exchange at each balance sheet date.
Foreign exchange transactions, net, in the consolidated statements of
income include the recognition of the effects that variations in the exchange
rates have on assets and liabilities denominated in foreign currencies and the
gains or losses on foreign exchange spot and forward transactions (see Note 1
h) undertaken by the Bank.
g) Investments
Investments which have a secondary market are carried at market value,
except for investments held by the brokerage and other subsidiaries which are
carried at the lower of cost or market value. Instructions issued by the
Superintendency of Banks require market value adjustments to be made against
income, except in the case of securities available for sale, in which case the
adjustments are made directly against the equity account "Market value
adjustments of available for sale securities" included in Reserves. All other
investments are carried at cost plus accrued interest and UF indexation
adjustment, as applicable.
The Bank enters into repurchase agreements as a form of borrowing. In this
regard, the Bank's investments which are sold subject to a repurchase
obligation and which serve as collateral for the borrowing are reclassified as
"Investment collateral under agreements to repurchase". The liability to
repurchase the investments is classified as "Securities sold under agreements
to repurchase".
The Bank also enters into resale agreements as a form of investment. Under
these agreements, the Bank purchases securities which are included as an asset
under the caption "Investments purchased under agreements to resell".
F - 12
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
h) Derivatives
The Bank enters into foreign exchange forward contracts for its own
account and the accounts of its customers. The Bank's forward contracts, held
for trading or hedging purposes, are valued at the spot rate of exchange at the
balance sheet date and the resulting gains or losses are recognized in income;
the discount or premium on a forward contract is included in net income over
the life of the forward contract.
The Bank entered into interest rate swap agreements to hedge part of its
investment portfolio. These agreements are recorded on balance sheet at
estimated fair market values. Unrealized gains or losses are credited or
charged to income for those agreements that are designated by the Bank's
management as hedges of part of the investment portfolio classified as trading.
In the case of the interest rate swap agreements designated by the Banks'
management as hedges of part of the investment portfolio classified as
permanent investments, unrealized gains and losses are credited or charged to
shareholders' equity.
The Bank's brokerage subsidiary enters into financial futures as part of
its portfolio management and trading activities. Financial futures contracts
are valued at their estimated market values. Gains on such contracts are
generally recognized when the transactions are closed and losses are recognized
immediately as incurred. However, gains are also recognized in income to the
extent of any previously recognized losses.
i) Bank premises and equipment
Bank premises and equipment are stated at acquisition cost net of
accumulated depreciation and have been restated for price-level changes.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the underlying assets.
The cost of maintenance and repairs is charged to income. The cost of
significant renovations and improvements is capitalized.
j) Investments in other companies
Investments in companies which are integral to the operations of the Bank
and where the Bank holds a less than majority interest are principally
accounted for under the equity method. Other minority investments are carried
at cost restated for price-level changes.
F - 13
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
k) Allowance for loan losses, charge-offs and recoveries
The Bank has established allowances to cover possible loan losses in
accordance with regulations issued by the Superintendency of Banks. In general,
the Bank is required to maintain a minimum allowance for loan losses based on
the greater of the global loan loss allowance and the individual loan loss
allowance.
Global loan loss allowance
A global loan loss allowance is calculated by multiplying the Bank's
outstanding loans by the greater of its "risk index" and 0.75%. The Bank's risk
index is based upon a classification of a portion of its customers' outstanding
loans into five categories based upon risk of loss for commercial loans and
overdue status for consumer and residential mortgage loans. The loan
classification guidelines of the Superintendency of Banks require that the Bank
classify the greater of (i) the commercial loans outstanding to its 400 largest
debtors or (ii) the commercial loans outstanding to the number of its largest
debtors whose commercial loans aggregate at least 75% of the total amount of
loans included in the commercial loan portfolio. Such guidelines also require
that the Bank classify its entire portfolio of consumer and residential
mortgage loans.
Once the customers' outstanding loans have been classified, specified
percentage allowances for each category are applied. The resulting weighted
average allowance rate is the risk index utilized in the calculation of the
global loan loss allowance.
Also in accordance with regulations of the Superintendency of Banks, the
risk index calculated for the classified loans must also be applied to the
non-classified commercial loan portfolio.
All consumer loans to an individual are classified in the same category as
the loan with the lowest classification (i.e., highest level of risk and
provision requirements).
Individual loan loss allowance
Once a loan becomes overdue for more than 90 days, a specific allowance is
calculated for 100% of the uncollateralized portion of the loan. Individual
loan loss allowances must be determined separately for the classified and
nonclassified loan portfolios, but are required only to the extent that, in the
aggregate, they exceed the global loan loss allowance for each portfolio.
F - 14
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Voluntary loan loss allowance
The Bank has recorded in 2001 and 2002 voluntary allowances in addition to
those required by the regulations of the Superintendency of Banks. The Bank has
adopted this policy in an effort to provide for any losses that could affect
its loan portfolio and that might arise from unforeseen circumstances beyond
known potential losses and losses inherent in a portfolio of the size and
nature of the Bank's portfolio. At December 31, 2001 and 2002 these voluntary
allowances amounted to MCh$ 3,681 and MCh$ 2,913, respectively. The effects of
this provision for loan losses in the consolidated statement of income are MCh$
5,463 MCh$ (3,681) and MCh$ 660 for the years ended December 31, 2000, 2001 and
2002, respectively.
Charge-offs and recoveries
In accordance with the regulations of the Superintendency of Banks,
commercial and mortgage loans must be charged-off no later than when they are
contractually past due 24 months (for loans without collateral) and 36 months
(for loans with collateral). The Bank will also charge-off commercial loans
prior to the meeting of this criteria when the Bank no longer considers such
loans to be collectible.
Consumer loans must be charged off no later than when overdue for six
months.
Charge-offs on loans are taken against the allowance for loan losses and
recoveries on charged-off loans are recorded directly to income.
Assets received in lieu of payment of loans are carried at market value
l) Income taxes
Current income tax is recorded on an accrual basis in conformity with
current income tax legislation.
Deferred taxes for temporary differences between the tax and financial
balance sheets are recorded on an accrual basis, in accordance with Technical
Bulletin No. 60 of Chilean Institute of Accountants, applied on a prospective
basis as from January 1, 1999. Calculation of deferred income taxes in 2001 and
2002 has been recorded against income during the year and includes the effect
of changes in the income tax rate, which increased from 15% in 2001 to 16% in
2002 and will increase progressively to 16.5% in 2003, and 17.0% in 2004, based
on the tax rate corresponding to the estimated period in which the timing
differences will reverse.
m) Statement of cash flows
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks.
n) Business combinations
In accordance with Chilean GAAP for banks, assets acquired and liabilities
assumed in a business combination are included in the consolidated financial
statements of the acquirer at their net book value on the date of acquisition.
The difference between the purchase price and the net book value of the assets
and liabilities acquired is considered to be goodwill and is amortized on a
straight-line basis over a period not exceeding ten years.
F - 15
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
o) Convenience translation to US dollars (unaudited)
The Bank maintains its accounting records and prepares its financial
statements in Chilean pesos. The US dollar amounts disclosed in the
accompanying consolidated financial statements are presented solely for the
convenience of the reader at the December 31, 2002 Observed Exchange Rate of
Ch$ 712.38 per US$ 1.00 which is the year end exchange rate used by financial
institutions in Chile. This translation should not be construed as a
representation that the Chilean peso amounts actually represent, or have been,
or could be converted into US dollars at that or any other exchange rate.
p) Reclassifications
Certain balances from prior years have been reclassified to conform with
the current year presentation.
NOTE 2 - ACCOUNTING CHANGES
- ---------------------------
On October 7, 2002, the Superintendency of Banks issued Circular No. 3,196
which requires mortgage finance bonds issued by the Bank to be presented net of
its corresponding liability. Until December 31, 2001, mortgage finance bonds
issued by the Bank were considered permanent investment securities and
classified under the caption Other financial investments. To conform with
current year presentation, outstanding Mortgage finance bonds issued as of
December 31, 2001, have also been presented net of its corresponding liability.
NOTE 3 - CASH AND DUE FROM BANKS
- --------------------------------
In accordance with the rules of the Superintendency of Banks, the Bank
must maintain certain non-interest bearing balances on deposit with the Central
Bank. The required balances are based upon specified financial criteria,
including the amounts of foreign borrowings and average liabilities.
F - 16
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 4 - INVESTMENTS
- --------------------
Investments are summarized as follows:
December 31,
2001 2002
-------- --------
MCh$ MCh$
Government securities
Central Bank securities ..................................... 187,653 287,787
Investments purchased under agreements to resell .................. 9,579 56,055
Investment collateral under agreements to repurchase
Central Bank securities ..................................... 147,814 203,577
Time deposits in Chilean financial institutions ............. 21,286 16,704
-------- --------
169,100 220,281
-------- --------
Other investments
Negotiable time deposits in Chilean financial institutions .. 15,589 43,353
Other marketable securities ................................. 8,345 38,404
-------- --------
23,934 81,757
-------- --------
Total investments ..................................... 390,266 645,880
======== ========
For investments stated at market value, there were net unrealized holding
gains (losses) of MCh$ 351, MCh$ 441 and MCh$ (986) included in the statements
of income for the years ended December 31, 2000, 2001 and 2002, respectively.
The adjustment for the Bank's permanent investments resulted in a charge to
equity of MCh$ 742 and a credit to equity of MCh$ 1,918 at December 31, 2001
and 2002, respectively.
NOTE 5 - DERIVATIVE FINANCIAL INSTRUMENTS
- -----------------------------------------
The Bank and its brokerage subsidiary enter into derivative transactions
as part of their asset and liability management (which include contracts for
hedging purposes) and trading activities and in acting as dealers to satisfy
their clients' needs. The notional amounts of these contracts are carried
off-balance-sheet.
a) Forward contract and futures
Foreign exchange forward contracts involve an agreement to exchange the
currency of one country for the currency of another country at an agreed-upon
price and settlement date. These contracts are generally standardized
contracts, normally for periods between 1 and 180 days and are not traded in a
secondary market; however, in the normal course of business and with the
agreement of the original counterparty, they may be terminated or assigned to
another counterparty.
When the Bank enters into a forward exchange contract it analyzes and
approves the credit risk (the risk that the counterparty might default on its
obligation). Subsequently, on an ongoing basis, it monitors the possible losses
involved in each contract. To manage the level of credit risk, the Bank deals
with counterparties of good credit standing, enters into master netting
agreements whenever possible and, when appropriate, obtains collateral.
F - 17
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Central Bank requires that foreign exchange forward contracts be made
only in US dollars and other major foreign currencies. In the case of the Bank,
most forward contracts are made in US dollars against the Chilean peso or the
UF. From time to time, forward contracts are also made in other currencies, but
only when the Bank acts as an intermediary.
The movement and balances of the notional amounts of foreign exchange forward
contracts during the years 2001 and 2002 are as shown below. The notional
amounts of these contracts, which are not included in the consolidated balance
sheet, significantly exceed the amount of potential credit risk.
Year ended December 31,
----------------------------------------------------
2001 2002
------------------------ ------------------------
Asset Liability Asset Liability
position position position position
(forward (forward (forward (forward
purchased) sales) purchased) sales)
---------- ---------- ---------- ----------
MCh$ MCh$ MCh$ MCh$
Balance at January 1 ............... 209,819 297,882 303,271 390,057
New contracts ...................... 1,816,669 1,781,868 1,842,678 2,312,105
Terminated and matured contracts ... (1,746,589) (1,722,873) (1,855,735) (2,108,856)
Foreign exchange adjustment ........ 23,372 33,180 16,374 21,060
---------- ---------- ---------- ----------
Balance at December 31 ............. 303,271 390,057 306,588 614,366
========== ========== ========== ==========
Accounting polices followed for derivatives are shown in Note 1 h).
Unrealized gains, losses, premiums and discounts arising from foreign exchange
forward contracts are shown on a net basis under Other assets or Other
liabilities (see Note 12).
F - 18
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
b) Interest rate swaps
The table below presents outstanding swaps at December 31, 2002 by
expected maturity of principal. Variable interest rates presented are based on
the London Interbank Offered Rate (LIBOR) in effect on the swaps at period-end.
The table was prepared under the assumption that these variable interest rates
remain constant. The variable rates to be received or paid will change to the
extent that rates fluctuate.
During de year
ending December 31,
-------------------
MCh$
Pay fixed swaps
Notional amounts:
2003...................................................... -
2004...................................................... 58,415
2005...................................................... 11,398
2006...................................................... 24,933
2007 and thereafter....................................... 75,579
---------
Total..................................................... 170,325
=========
Weighted average:
Received rate............................................. 1.66
Paid rate................................................. 3.50
The Bank considers the interest swap agreements set forth above to be
hedges of interest rate risk arising from a floating rate debt of MCh$ 170,325
(see Note 12).
Accounting polices followed for derivatives are shown in Note 1 h). The
net interest accrual arising from the swap contracts is recorded in net income
in the period that it arises.
NOTE 6 - LOANS
- --------------
The loans on the accompanying balance sheets are classified into
subcategories as described below.
Commercial loans are long-term and short-term loans made on a variable or
fixed-rate basis primarily to finance working capital or investments. Loans to
individuals or businesses which do not fit the definition of any of the other
loan categories below are classified as commercial loans.
Consumer loans are long-term and short-term installment loans to
individuals generally on a fixed-rate basis. Credit card balances subject to
interest rates are also included in this category.
F - 19
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Mortgage loans are inflation-indexed, fixed-rate, long-term loans with
monthly payments of principal and interest collateralized by mortgages on real
estate. These loans are specifically funded through the issuance of mortgage
finance bonds. In accordance with regulations of the Superintendency of Banks,
at the time of approval the amount of a mortgage loan cannot be more than 75%
of the lower of the purchase price or appraised value of the mortgaged
property.
Foreign trade loans are fixed or variable-rate short-term loans made in
foreign currencies (principally US dollars) to finance imports and exports.
Interbank loans are fixed-rate, short-term loans to financial institutions
that operate in Chile.
Lease contracts are agreements for direct financing leases of capital
equipment and other property. Leasing contracts include the aggregate of lease
payments receivable, less the amount of unearned income and value added tax.
These contracts are denominated in either US dollars or UFs and are adjusted
based on the variation of the Chilean peso against the US dollar or the rate of
inflation based on the CPI.
Other outstanding loans include the following:
December 31,
-------------------
2001 2002
-------- --------
MCh$ MCh$
Current account lines of credit - individuals and companies ... 33,508 53,994
Mortgage loans financed by Central Bank lines of credit ....... 5,283 3,646
Mortgage loans financed by the Bank's general borrowings ...... 242,560 310,143
Other ......................................................... 1,137 907
-------- --------
282,488 368,690
======== ========
Past due loans include, with respect to any loan, the amount of principal
or interest that is 90 days or more overdue, and the entire outstanding balance
of any loan is recorded under past due loans once the legal collection
procedures have been commenced.
Contingent loans consist of open and unused letters of credit together
with guarantees granted by the Bank in Chilean pesos, UFs and foreign
currencies (principally US dollars). Contingent loans (including accrued fees
receivable) are detailed as follow:
December 31,
-------------------
2001 2002
-------- --------
MCh$ MCh$
Open and unused letters of credit ............................. 29,381 41,293
Standby letters of credit and other guarantees ................ 37,803 43,398
-------- --------
67,184 84,691
======== ========
The Bank's liabilities under these agreements are included in contingent
liabilities (see Note 11 c).
F - 20
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Bank has certain loans on which the accrual of interest income has
been discontinued. These loans amounted to MCh$ 92,563, MCh$ 121,732 and MCh$
126,821 at December 31, 2000, 2001 and 2002, respectively. If these loans had
been accruing interest, net income would have increased by MCh$ 2,494 in 2000,
MCh$ 2,247 in 2001 and MCh$ 9,148 in 2002.
The following table summarizes the loan concentration by economic
activity, expressed as a percentage of total loans, excluding contingent loans
and before the allowance for loan losses:
December 31,
2001 2002
-------- --------
% %
Agriculture, livestock, forestry and fishing .......... 4.52 4.77
Mining ................................................ 1.47 3.65
Manufacturing ......................................... 6.62 8.94
Electricity, gas and water ............................ 3.89 4.48
Construction .......................................... 11.16 8.15
Trade ................................................. 12.42 10.37
Transport, storage and communications ................. 2.83 3.10
Financial services .................................... 12.42 8.98
Services .............................................. 13.73 16.11
Individuals:
Consumer ......................................... 9.60 9.77
Residential mortgage loans ....................... 21.34 21.68
-------- --------
Total ..................................... 100.00 100.00
======== ========
Substantially all of the Bank's loans are to borrowers doing business in
Chile. Thus, the recoverability of the Bank's loans could be affected by an
economic downturn in Chile.
During 2001 and 2002, the Bank securitized certain leasing contracts as
follows:
Book value of Effect on
leasing contracts Sale value net income
----------------- ---------- ----------
MCh$ MCh$ MCh$
2001 39,004.7 42,587.2 3,582.5
2002 5,219.6 6,470.9 1,251.3
F - 21
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 7 - LEASE CONTRACTS
- ------------------------
The amounts shown as lease contracts are receivables under direct financing
leases and have the following maturities as of December 31, 2002:
During the years Total Unearned Value-added Net lease
ending December 31, repayments income tax receivable
- ------------------- ---------- ------ --- ----------
MCh$ MCh$ MCh$ MCh$
2003 ........................... 7,711 (2,474) (1,063) 4,174
2004 ........................... 20,657 (4,192) (2,215) 14,250
2005 ........................... 20,657 (3,403) (2,215) 15,039
2006 ........................... 16,040 (2,432) (1,433) 12,175
2007 ........................... 11,069 (1,716) (871) 8,482
2008 and thereafter ............ 40,487 (8,970) (1,906) 29,611
------- ------- ------- -------
Total lease contracts 116,621 (23,187) (9,703) 83,731
======= ======= ======= =======
NOTE 8 - ALLOWANCE FOR LOAN LOSSES
- ----------------------------------
The changes in the allowance for loan losses are as follows:
Year ended December 31,
-----------------------------
2000 2001 2002
------- ------- -------
MCh$ MCh$ MCh$
Balances as of January 1 ................. 38,746 38,273 43,264
Charge-offs .............................. (23,759) (23,950) (28,274)
Provision charged to operations .......... 24,459 31,556 31,316
Price-level restatement (1) .............. (1,173) (2,615) (1,261)
------- ------- -------
Balances as of December 31 ............... 38,273 43,264 45,045
======= ======= =======
(1) Reflects the effect of inflation on the allowance for loan losses at the
beginning of each period, adjusted to constant pesos of December 31, 2002.
The provision charged to operations each year is included in the results
of operations under the caption "Provision for loan losses".
F - 22
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 9 - BANK PREMISES AND EQUIPMENT
- ------------------------------------
The major categories of Bank premises and equipment, net of accumulated
depreciation, are as follows:
December 31, Estimated useful
2001 2002 lives (in years)
---- ---- ----------------
MCh$ MCh$
Land ...................................... 11,113 11,109
Buildings ................................. 29,857 29,118 25 to 60
Furniture and fixtures .................... 1,971 155 10
Office equipment .......................... 12,894 14,349 5
Vehicles .................................. 106 144 10
Others .................................... 1,625 793 10
------- -------
Total bank premises and equipment, net... 57,566 55,668
======= =======
Certain Bank facilities and equipment are leased under various operating
leases. Rental expense was MCh$ 2,371 in 2000, MCh$ 2,260 in 2001 and MCh$
1,802 in 2002. Future minimum rental commitments under non-cancelable leases
are:
Payable during the years
ending December 31, MCh$
------------------- ----
2003 .............................................................. 1,664
2004 .............................................................. 1,155
2005 .............................................................. 951
2006 .............................................................. 548
2007 .............................................................. 402
2008 and thereafter ............................................... 1,510
-----
Total lease contracts 6,230
=====
F - 23
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 10 - INVESTMENTS IN OTHER COMPANIES
- ----------------------------------------
Investments in other companies consist of the following:
At December 31, Ownership
2001 2002 interest
---- ---- --------
MCh$ MCh$ %
Investments in other companies accounted
for under the equity method:
Nexus S.A. ........................................... 310 328 9.70
Transbank S.A. ....................................... 254 299 6.25
Santiago Stock Exchange .............................. 321 318 2.08
Electronic Stock Exchange ............................ 61 61 2.50
Valparaiso Stock Exchange ............................ 13 13 2.22
------- -------
Investments carried at cost: ............................... 959 1,019
Sociedad Interbancaria de Depositos de Valores S.A. .. 76 93
Other ................................................ 48 47
------- -------
Total investments in other companies ........... 1,083 1,159
======= =======
The Bank is authorized to invest in other entities which support its
banking business and in consequence has ownership interests in Nexus S.A.
(credit card processing services), Transbank S.A. (credit card operator) and
Redbanc S.A. (a system of automatic teller machines). The securities brokerage
subsidiary also maintains investments in the Santiago, Valparaiso and
Electronic stock exchanges in connection with its primary business activities.
Dividends received from investments accounted for under the equity method
aggregated MCh$ 74 in 2000, MCh$ 70 in 2001 and MCh$ 49 in 2002. Dividends
received from investments accounted for under the cost method aggregated MCh$
15 in 2000, MCh$ 19 in 2001 and MCh$ 1 in 2002.
F - 24
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 11 - OTHER ASSETS AND OTHER LIABILITIES
- --------------------------------------------
a) Other assets
2001 2002
-------- --------
MCh$ MCh$
Deferred income taxes (Note 23) ............................ 19,931 26,124
Rentals guarantee deposit .................................. 1,077 3,289
Credit card charges in process ............................. 1,330 1,808
Amounts receivable under spot foreign exchange transactions 16,032 15,316
Recoverable taxes .......................................... 656 3,269
Transactions in process (suspense accounts) ................ 1,324 1,092
Accrued interest receivable ................................ 11 109
Stationery ................................................. 283 243
Brokerage receivables ...................................... 6,558 26,352
Prepaid expenses ........................................... 519 521
Goodwill, net (1) .......................................... 2,574 2,182
Deferred expenses .......................................... 18,843 18,117
Deferred commissions ....................................... 2,828 1,805
Accounts and notes receivable .............................. 905 526
Common stock purchased under agreements to resell by
brokerage subsidiary ..................................... 8,254 9,045
Advances pending settlement ................................ 31 15
Others ..................................................... 1,867 3,696
-------- --------
Total other assets ............................. 83,023 113,509
======== ========
b) Other liabilities
December 31,
2001 2002
-------- --------
MCh$ MCh$
Amounts payable under spot foreign exchange transactions ... 28,502 15,840
Brokerage liabilities ...................................... 6,536 26,411
Deferred income taxes (Note 23) ............................ 6,221 9,069
Amounts payable from forward contracts .................... 4,085 2,336
Provision for staff vacation and indemnities ............... 3,842 2,495
Transactions in process (suspense accounts) ................ 2,730 2,123
Taxes payable ............................................. 14,771 12,412
Deferred commissions ....................................... 1,289 1,363
Others ..................................................... 272 382
-------- --------
Total other liabilities ........................ 68,248 72,431
======== ========
F - 25
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(1) Goodwill consists of the following:
Net book value at
Acquisition of: 2001 2002
- --------------- ---- ----
MCh$ MCh$
BBVA Sociedad de Leasing Inmobiliario............... - 5
BBVA Corredores de Bolsa BHIF S.A................... 35 -
BBVA Corredora Tecnica de Seguros BHIF Ltda......... 2,539 2,177
----- -----
2,574 2,182
===== =====
Accumulated amortization amounted to MCh$ 1,057 and MCh$ 1,446 at December 31,
2001 and 2002, respectively.
c) Contingent liabilities
Contingent liabilities consist of open and unused letters of credit,
together with guarantees by the Bank in Chilean pesos, UFs and foreign
currencies (principally US dollars). These liabilities represent the Bank's
obligations under such agreements. The Bank's rights under these agreements are
recognized as assets as contingent loans (see Note 6).
NOTE 12 - BORROWINGS
- --------------------
The Bank's long-term and short-term borrowings are summarized below.
Borrowings are generally classified as short-term when they have original
maturities of less than one year or are due on demand. All other borrowings are
classified as long-term, including the amounts due within one year on such
borrowings.
A summary of short-term and long-term borrowings is as follows:
December 31, 2001
------------------------------------
Long-term Short-term Total
---------- ---------- ----------
MCh$ MCh$ MCh$
Central Bank borrowings:
Borrowings for renegotiation of loans ......... 4,656 - 4,656
Other Central Bank borrowings ................. 6,990 - 6,990
Securities sold under to agreements to repurchase ... - 172,624 172,624
Mortgage finance bonds .............................. 239,816 - 239,816
Subordinated bonds .................................. 31,904 - 31,904
Other bonds ......................................... 43,884 - 43,884
Borrowings from domestic financial institutions ..... 1,146 63,996 65,142
Foreign borrowings (1) .............................. 75,959 51,509 127,468
Other obligations ................................... 9,668 30,804 40,472
---------- ---------- ----------
Total borrowings ........................ 414,023 318,933 732,956
========== ========== ==========
F - 26
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001
------------------------------------
Long-term Short-term Total
---------- ---------- ----------
MCh$ MCh$ MCh$
Central Bank borrowings:
Borrowings for renegotiation of loans ......... 3,561 - 3,561
Other Central Bank borrowings ................. 5,280 - 5,280
Securities sold under agreements to repurchase ...... - 255,565 255,565
Mortgage finance bonds .............................. 250,999 - 250,999
Subordinated bonds .................................. 31,607 - 31,607
Other bonds ......................................... 39,725 - 39,725
Borrowings from domestic financial institutions ..... 5,318 63,616 68,934
Foreign borrowings (1) .............................. 108,766 66,279 175,045
Other obligations ................................... 7,405 30,575 37,980
---------- ---------- ----------
Total borrowings ........................ 452,661 416,035 868,696
========== ========== ==========
(1) Includes a debt amounting to MCh$ 170,325 (MCh$ 16.221 on 2001) for which
interest rate risk is hedged by an interest rate swap. See Note 5 b).
a) Central Bank borrowings
Borrowings for the renegotiations of loans are as follows:
December 31,
2001 2002
---- ----
MCh$ MCh$
Renegotiation of mortgage loans .................. 4,656 3,561
----- -----
4,656 3,561
===== =====
These borrowings were provided by the Central Bank to fund renegotiated
loans, which arose from the economic recession and the crisis of the banking
system in the early 1980s. The borrowings for the renegotiation of mortgage
loans is linked to the UF index and carried annual real interest rates of 3 %
at December 31, 2001 and 2002.
F - 27
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The maturities of the outstanding amounts due under these borrowings at
December 31, 2002, are as follows:
During the year
ending December 31, MCh$
- ------------------- ----
2003 ....................................................... 338
2004 ....................................................... 308
2005 ....................................................... 296
2006 ....................................................... 281
2007 ....................................................... 268
2008 and thereafter ........................................ 2,070
------
Total borrowings for the renegotiation of loans ........ 3,561
======
Other Central Bank borrowings are as follows:
December 31,
2001 2002
---- ----
MCh$ MCh$
Industrial and agriculture finance program .......... 568 -
Credit line for acquisition of ANAP mortgage loans... 6,422 5,280
------ ------
6,990 5,280
====== ======
Loans for the long-term industrial and agriculture finance program are
linked to the UF index and are intended to be a source of financing for private
productive investment projects in the industrial and agricultural sectors.
These borrowings carried an annual real interest rate of 4.5% at December 31,
2001 and 2002.
The line of credit for the acquisition of mortgage loans from ANAP (the
former National Savings and Loan Association) was provided by the Central Bank
and is linked to the UF index. It carried an annual real interest rate of 6% at
December 31, 2001 and 2002.
The maturities of the long-term portion of these borrowings at December 31,
2002 are as follows:
During the year
ending December 31, MCh$
- ------------------- ----
2003 ....................................................... 1,330
2004 ....................................................... 1,279
2005 ....................................................... 1,356
2006 ....................................................... 1,315
------
Total Other Central Bank borrowings .................... 5,280
======
F - 28
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
b) Securities sold under agreements to repurchase
Securities sold under agreements to repurchase generally mature within 7
to 182 days from the transaction date and are entered into principally with
companies which are the Bank's clients. At December 31, 2002 the annual real
interest rates ranged between 1.4% and 3.0% (1.6% and 6.96% at December 31,
2001) on these agreements.
c) Mortgage finance bonds
These bonds are used to finance the granting of residential mortgage loans
and certain commercial loans secured by real estate. The outstanding principal
amounts of the bonds are amortized quarterly; the range of maturities of these
bonds is between 3 and 30 years. These bonds principally are linked to the UF
or similar indexes and carried a real weighted annual average rate of interest
of 6.48% at December 31, 2002 (6.26% at December 31, 2001). The maturities of
these bonds at December 31, 2002 are as follows:
During the year
ending December 31, MCh$
- ------------------- ----
2003 ....................................................... 23,801
2004 ....................................................... 21,684
2005 ....................................................... 20,857
2006 ....................................................... 19,798
2007 ....................................................... 18,867
2008 and thereafter ........................................ 145,992
--------
Total mortgage finance bonds ......................... 250,999
========
d) Subordinated bonds
The following are the different series of UF-denominated subordinated bonds:
Fixed
real annual
December 31, interest rate
------------------- -----------------
Series 2001 2002 2001 2002
------ ------ ------ ---- ----
MCh$ MCh$ % %
A bonds ...................... 5,041 5,053 8.5 8.5
B1, B2, B3 and B4 bonds ...... 6,750 6,717 7.6 7.6
B5 and B6 bonds .............. 3,408 3,407 7.7 7.7
B7 and B8 bonds .............. 16,705 16,430 6.5 6.5
------ ------
31,904 31,607
====== ======
F - 29
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Payments of interest on the subordinated bonds are made semiannually. The
Series A bonds have an original term of ten years and the entire principal is
due in April 2003. The Series B1, B2, B3 and B4 bonds have original term of
twenty years and principal is payable in equal semiannual installments during
the fourteenth through twentieth year. The final payment is due in 2013 for the
Series B1 bonds and 2014 for the Series B2, B3 and B4 bonds. The Series B5 and
B6 bonds have an original maturity of ten years with the entire principal
balance due at the end of the ten year term. The B5 and B6 bonds are payable
during the years 2003 and 2004. The Series B7 and B8 bonds have an original
term of twenty-one years and principal is payable in equal semiannual
installments during the sixth and twenty-first year.
The outstanding amount of subordinated bonds is included at their issue
price in the calculation of the Bank's minimum capital requirement, but only up
to 50% of the amount of its Basic Capital (see Note 14). For this purpose, the
amount that can be included in respect of bonds must be reduced annually by 20%
as from the sixth year prior to their maturity.
The maturities of the subordinated bonds at December 31, 2002 are as
follows:
During the year
ending December 31, MCh$
- ------------------- ----
2003 ....................................................... 9,119
2004 ....................................................... 688
2005 ....................................................... 733
2006 ....................................................... 780
2007 and thereafter ........................................ 20,287
------
Total subordinated bonds ....................... 31,607
======
e) Other bonds
Other bonds are summarized as follows:
December 31,
Series 2001 2002
------ ---- ----
MCh$ MCh$
A-1 bonds.................................... - -
A-2 bonds.................................... 157 -
B-2 bonds.................................... - -
D-1 bonds.................................... 5,820 2,570
D-2 bonds.................................... 5,105 2,566
D-3 bonds.................................... 5,441 5,578
D-4 bonds.................................... 5,192 5,578
D-5 bonds.................................... 7,430 7,811
D-6 bonds.................................... 14,739 15,622
------ ------
Total other bonds................... 43,884 39,725
====== ======
F - 30
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
These bonds were issued for the financing of lease contracts having a
maturity greater than one year. They are linked to the UF index and carry a
real annual weighted average interest rate of 5.94% (5.61% at December 31,
2001) with interest and principal payments due semiannually. The balance of the
bonds outstanding at December 31, 2002 mature as follows:
During the year
ending December 31, MCh$
- ------------------- ----
2003 ......................................................... 5,059
2004 ......................................................... 3,226
2005 ......................................................... 2,032
2006 ......................................................... 2,574
2007 and thereafter .......................................... 26,834
------
Total other bonds ...................................... 39,725
======
f) Borrowings from domestic financial institutions
Borrowings from domestic financial institutions are summarized as follows:
December 31,
2001 2002
------ ------
MCh$ MCh$
Long-term .................................................... 1,146 5,318
Short-term ................................................... 63,996 63,616
------ ------
Total borrowings from domestic financial institutions .. 65,142 68,934
====== ======
These borrowings are used to fund direct financing leases and the Bank's
general activities. At December 31, 2002, borrowings from domestic financial
institutions aggregating MCh$ 35,806 were linked to the UF index and carried a
real annual weighted average interest rate of 1.80% (5.61% at December 31,
2001), borrowings aggregating MCh$ 13,914 were denominated to the US dollars
and carried a real annual weighted average interest rate of 1.90%, and
borrowings aggregating MCh$ 19,214 were denominated in Chilean pesos and
carried a weighted monthly average nominal interest rate of 0.36% (0.54% at
December 31, 2001).
F - 31
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Borrowings from domestic financial institutions at December 31, 2002 have the
following maturities:
During the year
ending December 31, MCh$
- ------------------- ----
2003 ......................................................... 5,191
2004 ......................................................... 66
2005 ......................................................... 61
------
Total long-term ....................................... 5,318
Short-term ................................................... 63,616
------
Total borrowings from domestic financial institutions.. 68,934
======
g) Foreign borrowings
Outstanding foreign borrowings are summarized as follows:
December 31,
2001 2002
---- ----
MCh$ MCh$
Long-term .............................................. 75,959 108,766
Short-term ............................................. 51,509 66,279
------- -------
127,468 175,045
======= =======
The proceeds from foreign borrowings are used primarily to make loans to
borrowers in the Chilean export and import sector. These loans are denominated
principally in US dollars and carried an annual nominal weighted average
interest rate of 2.01% at December 31, 2002 (2.33% at December 31, 2001).
The maturities of these borrowings are as follows:
During the year
ending December 31, MCh$
- ------------------- ----
2003 ......................................................... 104,192
2004 ......................................................... 4,275
2005 ......................................................... 299
-------
Total long-term ....................................... 108,766
Short-term ................................................... 66,279
-------
Total foreign borrowings .............................. 175,045
=======
F - 32
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
h) Other obligations
Other obligations are summarized as follows:
December 31,
2001 2002
------ ------
MCh$ MCh$
Long-term obligations:
CORFO ................................................. 9,668 7,405
------ ------
Subtotal .......................................... 9,668 7,405
------ ------
Short-term obligations:
Acceptance of letters of credits ...................... 30,804 30,575
------ ------
Subtotal .......................................... 30,804 30,575
------ ------
Total ............................................. 40,472 37,980
====== ======
The CORFO borrowings have been provided by Corporacion de Fomento de la
Produccion (CORFO), the Chilean government development agency, to fund export
loans, loans to manufacturing companies and leasing operations. These
obligations are linked to the UF index or to the US dollar. At December 31,
2002, CORFO obligations aggregating MCh$ 6,644 were linked to the UF index and
carried a real annual weighted average interest rate of 5.41% (5.79% at
December 31, 2001) and obligations aggregating MCh$ 761 were linked to the US
dollar and carried an annual nominal weighted average interest rate of 7.18%
(7.48% at December 31, 2001).
Other long-term obligations at December 31, 2002 have the following maturities:
During the year
ending December 31, MCh$
- ------------------- ----
2003 ......................................................... 214
2004 ......................................................... 675
2005 ......................................................... 521
2006 ......................................................... 204
2007 ......................................................... 81
2008 ......................................................... 5,710
-----
Total long-term obligations ........................... 7,405
=====
F - 33
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 13 - SHAREHOLDERS' EQUITY
- ------------------------------
a) Shares outstanding
The Bank's capital consists of 361,222,027 no par value common shares
authorized, issued and outstanding at December 31, 2000, 2001 and 2002.
b) Movements in Shareholders' Equity
Year ended December 31, 2000
----------------------------
At the Ordinary Shareholder's Meeting held on March 28, 2000, the
shareholders agreed to distribute a dividend amounting to MCh$ 8,653
(historical)
In September 2000, Banco Bilbao Vizcaya Argentaria S.A. paid MCh$ 60,797
(historical), corresponding to the remaining 45% of the capital increase
subscribed for in September and October 1998.
In September 2000, share issue expenses amounting to MCh$ 751 (historical)
were deducted from the capital increase.
Year ended December 31, 2001
----------------------------
At the Ordinary Shareholders' Meeting held on March 16, 2001, the
shareholders approved a capital increase of MCh$ 2 (historical) through the
capitalization of earnings without the issue of new shares and the distribution
of MCh$ 14,033 (historical) as a dividend.
Year ended December 31, 2002
----------------------------
At the Ordinary Shareholders' Meeting held on April 23, 2002, the
shareholders agreed to distribute a dividend amounting to MCh$ 14,886
(historical).
NOTE 14 - MINIMUM CAPITAL REQUIREMENTS
- --------------------------------------
According to the current General Banking Law, banks should have a minimum
ratio of Total Capital to Risk Adjusted Assets of 8 %, net of required
allowances for loans losses, and a minimum ratio of Basic Capital to Total
Assets of 3 %, net of required allowances for loan losses. For these purposes,
Total Capital means the aggregate of: (a) a bank's paid-in capital and
reserves, excluding capital attributed to subsidiaries and foreign branches,
(b) its subordinated bonds, calculated at the issue price but not exceeding 50
% of its Basic Capital, and (c) its voluntary allowances for loan losses, up to
1.25 % of the Risk Adjusted Assets. Basic Capital includes paid-in capital and
reserves, but excludes the net income for the period. Risk Adjusted Assets are
based on total assets on an unconsolidated basis, which are then classified
into five categories, each of which has a different weight.
F - 34
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
At December 31, 2002, in accordance with the requirements of the General
Banking Law, the ratio of Total Capital to Risk Adjusted Assets was 12.3 % or
Ch$ 89,408 million higher than the 8 % minimum required by the first test under
the Banking Law. The ratio of Basic Capital to Total Assets was 7.4% or Ch$
140,564 million higher than the 3% minimum Basic Capital required by the second
test under the General Banking Law.
The Bank's mutual fund and securities brokerage subsidiaries are also
subject to minimum capital requirements as defined under Chilean regulations.
All such minimum regulatory capital requirements were being complied with at
December 31, 2001 and 2002.
NOTE 15 - CONTINGENCIES AND COMMITMENTS
- ---------------------------------------
a) Contingencies arising from contractual commitments
Until July 23, 1999, Banco BHIF, currently BBVA Banco BHIF, was required to
administer the "Adjustment account" corresponding to the purchase agreement for
the shares of the former Banco Nacional, signed on July 23, 1989.
The Bank's management and legal counsel believe that no material loss to the
Bank should result from any claim brought by the selling party relating to the
administration of the "Adjustment account", as described in the following
paragraphs.
As part of the purchase agreement, certain principal shareholders of Banco BHIF
acquired 97% of the shares of Banco Nacional from a group of companies and
individuals related to the selling party. This acquisition was made in order to
merge the former Banco Nacional with Banco BHIF, which was completed on
November 15, 1989.
In connection with the acquisition of the shares of the former Banco Nacional
and its subsequent merger with Banco BHIF, the Bank agreed that certain loans
due from the sellers to Banco Nacional would be restructured into
UF-denominated loans, to be repaid over a period of 12 years. The purchase
agreement provided that (i) the amount of recoveries on certain of Banco
Nacional's loans, as indicated by the sellers under the terms of the purchase
agreement (Adjustment account), exceeding the net book value of the loans, and
(ii) an amount equal to the allowance for loan losses released as a result of
improvements in the classification of the loans included in the Adjustment
account, would be credited on a quarterly basis to the Adjustment account and
treated as payment of interest and principal due from the sellers.
The purchase agreement also provided that any dispute relating to the
interpretation of the above agreement or the fulfillment of the parties'
respective obligations thereunder would be submitted to arbitration.
On July 23, 1989, the Adjustment account was divided in two parts with terms of
five and ten years, respectively. The latter, together with the sellers' rights
related to the Adjustment account, expired on July 23, 1999.
F - 35
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In accordance with the shares purchase contract, an Arbitration Court was set
up on April 8, 1997 to deal with the differences between the parties over the
interpretation of the Adjustment account, including the treatment of loans
contained therein, as well as other matters.
To date, both the sellers and the Bank have filed several claim with the
Arbitration Court, which have led to a number of correlated lawsuits referred
to as claims, as described bellow.
Regarding these lawsuits, two cases were settled in 2001. In claim No. 1 the
Bank was sentenced to pay UF 19,062 plus interest, totaling UF 38,003.20, which
was credited for its equivalent in Chilean pesos against Cidef S.A's loan with
the Bank, which is the lowest-rated company of the Errazuriz Group. In claim
No. 2, the Bank was sentenced to pay UF 8,292.12 plus interest, totaling UF
11,216.55, which was deposited for its equivalent in Chilean pesos at the
respective court. A significant part of sum deposited was seized, for the
account of BBVA Banco BHIF in the executive cases brought against companies of
the Errazuriz Group in the ordinary courts.
During 2002 seven arbitration cases were settled, of which the judgments
pronounced in the following claims did not favor the Bank: claim No. 3 for a
total of UF 10,206.67, which was paid by crediting such amount against Cidef
S.A. loans; claim No. 12 for UF 6,053.33 plus interest, a sentence that was
partially paid by crediting the principal amount against Cidef S.A.'s loans,
the calculation of the respective interest is still pending; claim No. 5 for UF
27,431.02 plus interest, a payment that has not been made because the loan was
not duly transferred by the Errazuriz Group, as such it is not possible to
determine who the creditor is; and claim No. 6 for UF 42,715.55 plus interest,
a sentence that has not yet been declared enforceable since it was appealed by
the Bank.
As to the other three judgments pronounced in 2002, the sentence of claim No.
17 accepted the complaint filed by the Bank, declaring that Commercial Las
Dalias S.A. is not a beneficiary of a loan callable against the Bank; the
judgment of claim No. 9 rejected a claim for damages against the Bank for UF
4,071.44 plus interest; and finally, the judgment in claim No. 4 rejected both
an indemnifying complaint filed by the Bank against the Errazuriz Group, and
the counter-claim filed by the latter against the Bank.
The following is the status of the remaining claims: six are pending the
discussion period and four have proceeded to the following stage; three are in
the evidence-gathering stage, and two have completed this stage; three are
awaiting judgement.
Considering the procedural stage of some of the pending proceedings and/or the
complexity of the matters dealt with in others, it is not yet possible to
determine the likely outcome of the actions brought against the Bank. Although
Management believes that the legal arguments presented by the sellers in
support of these actions lack merit, no assurance can be given that the final
outcome will not be adverse to the Bank.
In addition, late in 2000 the Bank was notified of seven consignment and
compensation payments made by debtors of the Errazuriz Group beneficiaries of
the Adjustment account in relation to the loans from the Bank, in order to
extinguish their liabilities. However, the Bank has appealed these resolutions.
F - 36
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Consequently, the Bank filed claims for the collection of the total amount due
from each of the beneficiaries of the Errazuriz Group, based on the disclaimer
to the due date by the debtors. Judgment has already been rendered in six of
the seven lawsuits to date. In three of the cases, the Bank obtained favorable
sentences, and the remaining three cases were rejected based on technical
reasons, as the offer of total and subsequent consignment payments does not
imply a waiver of the period granted. Therefore, the loans would not have been
required to be paid upon filing the claim and none of the debtors disclaim the
existence of such credits. All the sentences have been appealed by the Bank
and/or the defendants.
Also in 2000 the Bank was notified of three other consignment and compensation
payments made by the debtors of the Errazuriz Group, which are not
beneficiaries of the Adjustment account, seeking to extinguish their
liabilities. This led to the Bank bringing an executory action against these
three debtors, with a sentence favorable to the Bank in two of them to date.
The remaining lawsuit is pending judgement.
Finally, the Errazuriz Group has brought three executive actions against the
Bank before the Ordinary Courts on the basis of the arbitration judgments
pronounced in claims No. 1, 3, 5 and 6. In all these lawsuits, the Bank has
opposed the motions as they are based either on the payment of liabilities that
the Bank has already paid, claims No. 1 and 3, on loans granted through an
irregular procedure, claim No. 5, or else requiring the payment of liabilities
not yet due claim No. 6. Two of these cases are in the discussion stage and one
has concluded its evidence gathering period.
b) Commitments and responsibilities recorded in memorandum accounts
The Bank and its subsidiaries maintain the following memorandum accounts
relating to commitments or responsibilities arising in the ordinary course of
business:
2001 2002
---- ----
MCh$ MCh$
Safekeeping ............................................. 511,840 587,297
Loans approved not yet disbursed ........................ 106,417 86,723
Foreign collections ..................................... 6,488 9,101
Fixed-income shares and instruments held in custody ..... 42,001 47,909
Documents for collection in Chile ....................... 52,581 45,653
Leasing contracts signed prior to delivery of assets .... 5,328 5,804
The above includes only the most significant balances. Contingent loans and
liabilities are shown in the Consolidated balance sheets.
F - 37
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
c) Guarantees of operations
In accordance with Article 30 of Law 18,045, the subsidiary BBVA Corredores de
Bolsa BHIF S.A. contracted for an insurance policy with Compania de Seguros de
Credito Continental S.A. to ensure full compliance with its obligations as a
stockbroker. The beneficiaries are its present and future creditors of
brokerage operations, and are represented by the Santiago Stock Exchange and
Electronic Stock Exchange. In addition, BBVA Corredores de Bolsa BHIF S.A.
contracted for a stockbrokers insurance policy with Compania MAPFRE Seguros
Generales in order to comply with the agreements reached by the Board of the
Santiago Stock Exchange at its meeting held on November 24, 1997.
The terms of the policies are as follows:
Insurance Commencement Expiry
Company date date Coverage
------- ---- ---- --------
Compania de Seguros de
Credito Continental S.A. 04/22/2001 04/22/2003 UF 20,000
Cia. de Seguros Generales
MAPFRE Seguros Generales 04/01/2001 03/31/2003 US$ 5,400,000
d) Securities in guarantee
At December 31, 2002 and 2001, guarantees in the form of marketable equity
securities in favor of the Custody Department of the Santiago Stock Exchange
amount to MCh$ 8,932.3 (MCh$ 8,345.3 in 2001).
e) Other contingencies
At the date of these financial statements, the Bank was involved in other
litigation arising in the ordinary course of business. In the opinion of
Management and its legal counsel, the final outcome of such litigation will not
have a significant effect on the Bank's financial position or its results of
operations.
F - 38
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 16 - TRANSACTIONS WITH RELATED PARTIES
- -------------------------------------------
In accordance with the General Banking Law, related parties are defined as
individuals and companies who are directors, officers or shareholders who own
more than one percent of the Bank's shares. Companies in which a director,
officer or shareholder of the Bank holds more than a 5% interest are also
considered to be related parties, as well as companies that have common
directors with the Bank.
a) Loans made to related parties
Loans made to related parties, all of which are current, are as follows:
December 31,
---------------------------------------
2001 2002
------------------- -------------------
Collateral Collateral
Loans Pledged Loans Pledged
------- ------- ------- -------
MCh$ MCh$ MCh$ MCh$
Operating companies:
Conavicoop .................................. 5,950 - 3,449 485
Consorcio Persa de Chile .................... 485 - 501 -
Vina Selentina S.A. ......................... - - 1 -
Jardin Infantil Casanueva ................... 23 23 22 22
Taz S.A. .................................... - - 1 -
Grupo Eulen Chile S.A. ...................... - - 153 -
Investment companies:
Banco BNL do Brasil ......................... 1,082 - 3,299 -
Bifactoring S.A. ............................ 2,310 - 2,006 -
BBVA Banco Ganadero S.A. .................... 25 - - -
BBV Banco Frances ........................... 200 - 93 -
Banco Bilbao Vizcaya Argentaria Mexico ...... - - 288 -
Banco Bilbao Vizcaya Argentaria Brasil ...... 5,149 - 6,792 -
Banco Bilbao Vizcaya Argentaria Madrid ...... 64 - 48 -
Banco Bilbao Vizcaya Argentaria New York .... - - 10,378 -
Banco Continental ........................... 108 - 177 -
Banco Frances Uruguay ....................... 3 - 1,697 -
Banco Provincial S.A. ....................... 24 - 25 -
Sociedad de Inversiones Rio Side Ltda ....... 34 26 30 24
AFP Provida S.A. ............................ 1 - 4 -
Inversiones Penuelas S.A. ................... 12 - - -
Individuals (UF 3,000 or more) .............. 2,158 1,973 2,004 1,892
Individuals (less than UF 3,000) ............ 1,265 1,030 1,404 1,145
------- ------- ------- -------
18,893 3,052 32,372 3,568
======= ======= ======= =======
In the above table, operating companies are defined as commercial or
manufacturing companies and investment companies are defined as companies whose
purpose is to hold shares in other companies.
F - 39
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
b) Other transactions with related parties
During the years ended December 31, 2000, 2001 and 2002 the Bank had the
following significant revenues (expenses) from services provided to (by)
related parties:
Year ended December 31,
---------------------------------------------------------------------------
2000 2001 2002
Company Relationship Revenues Expenses Revenues Expenses Revenues Expenses
------- ------------ -------- -------- -------- -------- -------- --------
MCh$ MCh$ MCh$ MCh$ MCh$ MCh$
Redbanc S.A. Equity investee - (510) - (464) - (481)
E. Bertelsen Asesorias S.A. Director of Bank is
shareholder in related
company - (150) - (113) - (116)
Banco Bilbao Vizcaya
Argentaria S.A. Shareholder - (2,005) - (1,538) 20 (1,725)
Jose Domingo Eluchans Shareholder in
Asesorias Ltda. common - (62) - (64) - (63)
BBVA Compania de Shareholder in
Seguros de Vida S.A. common - (62) - (165) 283 -
Constructora y Shareholder in
Administradora Uno S.A. common - (32) - - - -
Parque Arauco S. A. Shareholder in
common - (98) - (96) - (120)
Other Shareholder in
common - (130) - (268) 44 (270)
Article 89 of the Chilean Companies Law requires that the Bank's
transactions with related parties be on a market basis or on terms similar to
those customarily prevailing in the market.
NOTE 17 - DIRECTORS' EXPENSES AND REMUNERATION
- ----------------------------------------------
The following items were charged to expense for services provided by the
members of the Board:
Year ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
MCh$ MCh$ MCh$
Remuneration established by the General
Shareholders' Meeting ............................ 561 611 610
Advisory fees ...................................... 62 64 63
Travel allowance ................................... 10 7 16
--- --- ---
Total .................................. 633 682 689
=== === ===
F - 40
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 18 - INCOME FROM SERVICES, NET
- -----------------------------------
Income from services and the related expenses are summarized as follows:
Year ended December 31,
-----------------------------
2000 2001 2002
------- ------- -------
MCh$ MCh$ MCh$
Fees from services:
Commissions on insurance brokerage ............... 1,588 1,951 2,170
Credit cards ..................................... 1,144 1,299 1,275
Current accounts ................................. 2,898 4,839 4,459
Pension payments ................................. 1,043 2,719 3,840
Contingent loans and letters of credit ........... 623 1,001 762
Automatic teller machines ........................ 1,059 541 1,596
Collections ...................................... 798 389 354
Purchases and sales of foreign exchange .......... 142 214 272
Lines of credit and overdrafts ................... 919 484 675
On-line accounts ................................. 312 210 169
Custody and Trust services ....................... 57 59 130
Service charges on deposit accounts .............. 226 206 204
Service charges on loans ......................... 536 380 534
Fees from collections of insurance premiums ...... 1,199 1,260 1,507
Loan and securities collections .................. 153 - -
Brokerage fees ................................... 553 610 737
Commissions on mutual and investment
funds administration ........................... 2,176 2,301 2,578
Lease contracts fees ............................. - 474 483
Financial advisory services ...................... 306 432 -
Fees charged on prepaid loans .................... 1 573 1,645
Other ............................................ 902 2,340 2,944
------- ------- -------
Total income from services ................. 16,635 22,282 26,334
======= ======= =======
Year ended December 31,
-----------------------------
2000 2001 2002
------- ------- -------
MCh$ MCh$ MCh$
Services expenses:
Brokerage expenses ............................... (64) (74) (39)
Brokerage fees ................................... (360) (331) (305)
Credit card operators ............................ (613) (778) (1,017)
Automatic teller machines ........................ (791) (873) (1,031)
Collection expenses .............................. (19) (12) (20)
Commissions on placement and servicing of loans .. (2,833) (2,553) (1,777)
Other ............................................ (160) (433) (383)
------- ------- -------
Total services expenses .................... (4,840) (5,054) (4,572)
======= ======= =======
F - 41
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 19 - GAINS AND LOSSES ON FINANCIAL INSTRUMENTS
- ---------------------------------------------------
Gains and losses on financial instruments are summarized as follows:
Year ended December 31,
-----------------------------
2000 2001 2002
------- ------- -------
MCh$ MCh$ MCh$
Gains on financial instruments:
Gains on sales and mark-to-market valuations
of financial instruments ......................... 4,704 11,640 13,101
------- ------- -------
4,704 11,640 13,101
======= ======= =======
Losses on financial instruments:
Losses on sales and mark-to-market valuations
of financial instruments ......................... (753) (3,086) (6,961)
------- ------- -------
(753) (3,086) (6,961)
======= ======= =======
NOTE 20 - RECOVERY OF LOANS PREVIOUSLY CHARGED-OFF
- --------------------------------------------------
Recovery of loans previously charged-off include the following items:
Year ended December 31,
-----------------------------
2000 2001 2002
------- ------- -------
MCh$ MCh$ MCh$
Recoveries on loans previously charged-off ............ 7,572 7,420 9,679
Recoveries of loans reacquired from the Central Bank .. 102 80 17
------- ------- -------
7,674 7,500 9,696
======= ======= =======
F - 42
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 21-NON OPERATING INCOME AND EXPENSES
- -----------------------------------------
Non-operating income and expenses are set forth below:
Year ended December 31,
--------------------------------
2000 2001 2002
-------- -------- --------
MCh$ MCh$ MCh$
Non-operating income:
Gain on sales of Bank premises and equipment ..................... 2 176 18
Recovery of expenses from customers .............................. 1,065 1,855 2,918
Recovery of assets received in lieu of payment previously
charged-off .................................................... 685 775 806
Rental income .................................................... 195 202 218
Gain on sales of assets received in lieu of payment .............. 102 230 270
Gains on sales of leasing assets ................................. 604 84 137
Other ............................................................ 213 626 409
-------- -------- --------
Total non-operating income ................................ 2,866 3,948 4,776
======== ======== ========
Non-operating expenses:
Provision for Adjustment account (Note 15 a) ..................... - - (101)
Write-offs of assets received in lieu of payment ................. (1,048) (540) (1,405)
Provisions for losses on assets received in lieu of payment ...... (746) (1,027) (678)
Loss on sales of Bank premises and equipment ..................... (4) (15) (11)
Expenses incurred on management of assets received in lieu
of payment ...................................................... (141) (210) (232)
Amortization of goodwill ......................................... (380) (418) (389)
Discounts to customers on ANAP mortgage loans .................... (129) (108) (122)
Other ............................................................ (397) (503) (785)
-------- -------- --------
Total non-operating expenses .............................. (2,845) (2,821) (3,723)
======== ======== ========
NOTE 22 - PRICE-LEVEL RESTATEMENT
- ---------------------------------
The price-level restatement loss is determined by restating the following
non-monetary assets and liabilities:
Year ended December 31,
--------------------------------
2000 2001 2002
-------- -------- --------
MCh$ MCh$ MCh$
Restatement of non monetary accounts based on Consumer Price Index:
Bank premises and equipment ...................................... 2,533 1,850 1,806
Other non-monetary assets and liabilities ........................ 876 808 930
Shareholders' equity ............................................. (8,797) (7,122) (6,900)
-------- -------- --------
Net price-level restatement loss .......................... (5,388) (4,464) (4,164)
======== ======== ========
F - 43
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 23 - INCOME TAXES
- ----------------------
a) Income tax provision
The provision for income taxes charged to income is summarized as follows:
Year ended December 31,
-----------------------------
2000 2001 2002
------- ------- -------
MCh$ MCh$ MCh$
Amortization of effects of deferred income taxes
accumulated at the beginning of the year .......... 3,864 191 295
Provision for current income tax .................... (1,015) (6,135) (6,261)
Deferred income taxes for the year .................. (865) 5,063 3,448
------- ------- -------
Total income tax benefit (expense) ...... 1,984 (881) (2,518)
======= ======= =======
b) Deferred income tax balances are as follows:
Balances at
-------------------------------------
Temporary differences December 31, 2001 December 31, 2002
- --------------------- ----------------- -----------------
MCh$ MCh$
ASSETS
Allowance for loan losses .................................. 5,280 5,456
Charged-off loans that are tax assets ...................... 7,055 7,737
Lease contracts ............................................ 6,234 9,728
Allowance for losses from high-risk rated countries ........ 234 234
Tax loss carryforward ...................................... - 24
Interest on overdue and past-due loans ..................... 2,026 3,607
Accrual for employee vacations ............................. 272 272
Others ..................................................... 1,235 958
-------- --------
Subtotal ............................................ 22,336 28,016
Less: Unamortized offsetting liability balance ................. (2,405) (1,892)
-------- --------
Net assets .......................................... 19,931 26,124
-------- --------
LIABILITIES
Accelerated depreciation of bank premises and equipment .... 6,205 9,053
Deferred expenses .......................................... 1,185 1,050
Others ..................................................... 233 180
-------- --------
Subtotal ............................................ 7,623 10,283
Less: Unamortized offsetting asset balance ................ (1,402) (1,214)
-------- --------
Net liabilities ..................................... 6,221 9,069
-------- --------
Net position ........................................ 13,710 17,055
======== ========
F - 44
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The offsetting asset and liability accounts correspond to the accumulated
effect of deferred income taxes which, in accordance with regulations up to
1998, were not recorded prior to January 1, 2000. These asset and liability
accounts are amortized for each account over the period of the reversal of the
corresponding temporary difference. The liability corresponding to the effect
on tax loss carryforward is reversed as the loss is used.
NOTE 24 - FOREIGN CURRENCY POSITION
- -----------------------------------
The consolidated balance sheets include assets and liabilities payable in
foreign currencies which have been translated into Chilean pesos at the
applicable exchange rates as of December 31, 2001 and 2002, and assets and
liabilities which are payable in Chilean pesos subject to exchange rate
fluctuations, as detailed below.
December 31, 2001 December 31, 2002
------------------------------------- -------------------------------------
Payable Payable Payable Payable
in foreign in Chilean in foreign in Chilean
currency pesos Total currency pesos Total
---------- ---------- ---------- ---------- ---------- ----------
MCh$ MCh$ MCh$ MCh$ MCh$ MCh$
ASSETS
Cash and due from banks ..... 68,720 - 68,720 25,462 - 25,462
Loans ....................... 268,608 56,575 325,183 341,127 56,703 397,830
Investments ................. 1,858 88,047 89,905 58,716 360,630 419,346
Other assets ................ 362,258 - 362,258 370,339 - 370,339
---------- ---------- ---------- ---------- ---------- ----------
Total assets ........ 701,444 144,622 846,066 795,644 417,333 1,212,977
========== ========== ========== ========== ========== ==========
LIABILITIES
Deposits and other
obligations .............. 215,198 1 215,199 121,714 - 121,714
Foreign borrowings .......... 127,468 - 127,468 188,960 - 188,960
Other liabilities ........... 499,441 4,572 504,013 897,312 760 898,072
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities ... 842,107 4,573 846,680 1,207,986 760 1,208,746
========== ========== ========== ========== ========== ==========
Net assets (liabilities) in
foreign currency ............. (140,663) 140,049 (614) (412,342) 416,573 4,231
========== ========== ========== ========== ========== ==========
In addition, as disclosed in Note 5, at December 31, 2002 the Bank had
notional amounts of foreign exchange contracts with an asset position of MCh$
306,588 (2001: MCh$ 303,271) and a liability position of MCh$ 614,367 (2001:
MCh$ 390,057).
F - 45
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 25 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
- -------------------------------------------------------
The estimated fair values of the Bank's financial instruments, their
carrying values and the major assumptions and methodologies used to estimate
fair values at December 31, 2001 and 2002 are presented hereunder. The fair
value of a financial instrument is defined as the amount at which the
instruments could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale.
For those financial instruments with no quoted market prices available,
fair values have been estimated using present value or other valuation
techniques. These techniques are inherently subjective and are significantly
affected by the assumptions used, including the discount rates, estimates of
future cash flows and prepayment assumptions. In that regard, the derived fair
value estimates cannot be substantiated by comparison to independent markets
and, in many cases, could not be realized in immediate settlement of the
instruments.
In addition, the fair values presented below do not attempt to estimate
the value of the Bank's revenue generating businesses and anticipated future
business activities, that is, they do not represent the Bank's value as a going
concern.
The estimated fair values of financial instruments are as follows:
December 31, 2001 December 31, 2002
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------ ---------- ------ ----------
MCh$ MCh$ MCh$ MCh$
ASSETS
Cash and due from banks ............ 205,110 205,110 311,023 311,023
Investments ........................ 390,266 390,266 645,880 645,880
Loans .............................. 1,730,711 1,504,316 1,968,828 2,008,686
Other assets ....................... 150,590 150,590 185,782 185,782
LIABILITIES
Deposits ........................... 1,425,332 1,463,469 1,912,485 1,909,345
Central Bank borrowings ............ 11,646 11,658 8,841 9,043
Securities sold under agreements
to repurchase .................... 172,624 172,624 255,565 255,565
Mortgage finance bonds ............. 239,816 239,816 250,999 285,930
Other borrowings ................... 308,870 301,238 353,291 373,004
Other liabilities .................. 68,248 68,248 72,431 72,431
The carrying amounts of loans in the above table exclude contingent loans
since they represent undisbursed amounts under undrawn letters of credit and
other credit guarantees granted by the Bank. The offsetting liability amount,
recorded as contingent liabilities in the Consolidated balance sheets, has also
been excluded.
The carrying amounts of loans do not include lease contracts because
disclosure of fair value of such contracts is not required under the applicable
accounting pronouncement.
F - 46
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following notes summarize the major methods and assumptions used in
estimating the fair values of financial instruments:
Short-term financial instruments
Short-term financial instruments are valued at their carrying amounts
included in the Consolidated balance sheets, which are believed by the Bank to
be reasonable estimates of fair value due to the relatively short period to
maturity of the instruments. This approach applies to cash and due from banks,
other assets, short-term Central Bank borrowings, securities sold under
agreements to repurchase and other liabilities.
Investments
The estimated fair value of these financial instruments was determined
using either quoted market prices or dealer quotes where available, or quoted
market prices of financial instruments with similar characteristics.
Loans
Estimated fair values have been determined for loan portfolios with
similar financial characteristics. Loans were segregated by type such as
commercial and consumer, and each category was further segmented based on fixed
and variable rates and accrual vs. non-accrual status. The fair values of
fixed-rate loans were estimated by discounting scheduled cash flows using
prevailing market rates for those loans at the end of 2001 and 2002,
respectively. For variable-rate loans, their carrying amounts were considered
to be equivalent to their fair values.
For non-accruing loans, the estimated fair values were based on the
discounted value of estimated cash flows arising from the liquidation of the
collateral or other expected sources at an estimated discount rate. The value
of these loans was then adjusted for the higher risk involved by deducting the
specific provisions for the loans from the discounted cash flow amounts.
Derivatives
Foreign exchange contracts (included in other assets or liabilities in the
table above) are carried at market value in the Consolidated balance sheets,
based on the Observed Exchange Rate at the end of the year.
For interest rate swaps, estimated fair values were obtained from dealer
quotes. The total of MCh$ 302 (MCh$ 180 at December 31, 2001) is included in
other assets in the table of fair values of financial instruments set forth
above.
Deposits
The fair value of deposits with no defined maturity, such as non-interest
bearing deposits and savings accounts, is considered to be the amount payable
on demand at the reporting date. The fair value of fixed-maturity deposits is
estimated using rates currently offered for deposits of similar remaining
maturities. The value of long-term relationships with depositors is not taken
into account in estimating the fair values disclosed.
F - 47
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Long-term borrowings
The fair value of long-term borrowings (included in Mortgage finance bonds
and Other borrowings in the table above) is estimated based on the present
value of future cash flows, discounted at interest rates available to the Bank
for new debt of similar type and remaining maturity at December 31, 2001 and
2002.
NOTE 26 - FIDUCIARY ACTIVITIES
- ------------------------------
The following items are recorded in memorandum accounts by the Bank and
represent fiduciary safekeeping and custody services:
December 31,
2001 2002
---- ----
MCh$ MCh$
Securities held in safekeeping ....................... 511,840 587,297
Amounts to be collected on behalf of third parties ... 59,069 54,754
------- -------
Total ....................................... 570,909 642,051
======= =======
NOTE 27 - INCOME STATEMENTS AND BALANCE SHEETS (SEC FORMAT)
- ----------------------------------------------
The presentation of the financial statements prepared in accordance with
Chilean GAAP differs significantly from the format required by the SEC under
Rules 210.9 to 210.9-07 of Regulation S-X ("Article 9"). The Chilean GAAP
financial statements set forth below have been restated in constant Chilean
pesos of December 31, 2002 purchasing power using the adjustment factor arising
from the CPI and are shown in accordance with the format required by Article 9.
The principal reclassifications which were made to the basic Chilean GAAP
financial statements in order to present them in the Article 9 format are as
follows:
1. Elimination of contingent assets and liabilities from the balance sheet.
2. Presentation of Recoveries of loans previously charged-off as a reduction
of the Provision for loan losses instead of as Other income.
3. Reclassification of fees relating to contingent loans from interest income
under Chilean GAAP to Non-interest income under Article 9.
In connection with the preparation of the Article 9 income statements, the
price-level restatement includes the effect of inflation primarily resulting
from interest-earning assets and interest-bearing liabilities. As the Bank does
not compute the price-level adjustment for separate categories of assets and
liabilities, such adjustment is presented as a component of interest expense.
F - 48
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Consolidated income statements
Year ended December 31,
-----------------------------------
2000 2001 2002
--------- --------- ---------
MCh$ MCh$ MCh$
Interest income
Interest and fees on loans .................................. 188,833 180,534 175,620
Interest on investments ..................................... 35,874 36,280 39,542
Interest on deposits with banks ............................. 517 571 536
--------- --------- ---------
Total interest income ................................ 225,224 217,385 215,698
--------- --------- ---------
Interest expense
Interest on deposits ........................................ (76,369) (64,932) (57,706)
Interest on securities sold under agreements to repurchase .. (17,583) (15,447) (6,248)
Interest on other borrowed funds ............................ (6,693) (5,492) (8,441)
Interest on long-term debt .................................. (45,265) (38,981) (35,055)
Price-level restatement ..................................... (5,388) (4,464) (4,164)
--------- --------- ---------
Total interest expense ............................... (151,298) (129,316) (111,614)
--------- --------- ---------
Net interest income .............................................. 73,926 88,069 104,084
Provision for loan losses ........................................ (16,887) (24,136) (21,637)
--------- --------- ---------
Net interest income after provision for loan losses .. 57,039 63,933 82,447
--------- --------- ---------
Other income
Fees and commissions ........................................ 16,848 22,481 26,363
Brokerage and securities income ............................. 193 279 432
Gain on investment activities ............................... 3,950 8,554 6,140
Net gains (losses) on foreign exchange ...................... 1,377 (4,162) (14,335)
Recoveries and restatements of loans
reacquired from the Central Bank .......................... 102 80 17
Other revenue ............................................... 2,830 3,914 4,892
--------- --------- ---------
Total other income ................................... 25,300 31,146 23,509
--------- --------- ---------
Other expenses
Salaries .................................................... (28,555) (33,099) (33,118)
Net premises and equipment expenses ......................... (3,181) (3,966) (4,746)
Administration expenses ..................................... (28,673) (30,286) (31,083)
Other expenses .............................................. (9,010) (11,512) (14,236)
--------- --------- ---------
Total other expenses ................................. (69,419) (78,863) (83,183)
--------- --------- ---------
Income before income taxes ....................................... 12,920 16,216 22,773
Income taxes ................................................ 1,984 (881) (2,518)
--------- --------- ---------
Net income ........................................... 14,904 15,335 20,255
========= ========= =========
F - 49
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Consolidated Balance Sheets
December 31,
2001 2002
---------- ----------
MCh$ MCh$
ASSETS
Cash and due from banks ............................ 145,973 284,463
Interest bearing deposits in other banks ........... 59,137 26,560
Securities purchased under agreements to resell .... 9,579 56,055
Trading securities ................................. 288,211 312,026
Available for sale securities ...................... 90,980 277,799
Securities to be held to maturity .................. 1,496 -
Loans .............................................. 1,798,526 2,037,060
Unearned income .................................... (24,550) (23,187)
Allowance for loan losses .......................... (43,264) (45,045)
---------- ----------
Loans, net ......................................... 1,730,712 1,968,828
Premises and equipment, net ........................ 57,566 55,668
Other assets ....................................... 93,090 129,348
---------- ----------
Total assets ................................. 2,476,744 3,110,747
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing ............................... 322,511 457,801
Interest bearing ................................... 1,102,821 1,454,684
---------- ----------
1,425,332 1,912,485
Short-term borrowings .............................. 146,309 160,470
Securities sold under agreements to repurchase ..... 172,624 255,565
Other liabilities .................................. 68,248 72,431
Long-term debt ..................................... 414,023 452,661
---------- ----------
Total liabilities ............................ 2,226,536 2,853,612
---------- ----------
Minority interest in consolidated subsidiaries ........... 88 113
---------- ----------
Shareholders' equity
Common stock ....................................... 151,877 151,877
Reserves ........................................... 98,243 105,145
---------- ----------
Total shareholders' equity ................... 250,120 257,022
---------- ----------
Total liabilities and shareholders' equity ... 2,476,744 3,110,747
========== ==========
F - 50
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Total assets set forth in the basic Chilean GAAP balance sheets are
reconciled to Total assets in the Article 9 balance sheets above as follows:
At December 31,
2001 2002
---- ----
MCh$ MCh$
Total assets under Chilean GAAP format ............. 2,543,861 3,196,204
Elimination of contingent liabilities .............. (67,117) (85,457)
---------- ----------
Total assets under Article 9 format ........... 2,476,744 3,110,747
========== ==========
The activity in the balances of loans to related parties in accordance
with the Article 9 definition of related parties is as follows:
MCh$
----
Balance at January 1, 2001 ...................................... 19,249
New loans ....................................................... 24,639
Repayments ...................................................... (19,650)
--------
Balance at December 31, 2001 .................................... 24,238
New loans ....................................................... 106,007
Repayments ...................................................... (113,013)
--------
Balance at December 31, 2002 .................................... 17,232
========
NOTE 28 - DIFFERENCES BETWEEN CHILEAN AND UNITED STATES GENERALLY
- ------------------------------------------------------------------
ACCEPTED ACCOUNTING PRINCIPLES
------------------------------
Accounting principles generally accepted in Chile vary in certain
important respects from the accounting principles generally accepted in the
United States of America ("US GAAP"). Such differences involve certain methods
for measuring the amounts shown in the consolidated financial statements, as
well as additional disclosures required by US GAAP.
1. Differences in measurement methods
Set forth below is a description of the significant differences between
accounting principles generally accepted in Chile and accounting principles of
the Superintendency of Banks (collectively, "Chilean GAAP") and US GAAP. The
effects of differences in the presentation of the financial statements are
shown in Note 27. References below to "SFAS" are to Statements of Financial
Accounting Standards in the United States of America.
F - 51
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The cumulative inflation rate in Chile as measured by the Consumer Price
Index for the three-year period ended December 31, 2002 was approximately
10.8%. Chilean accounting principles require that financial statements of banks
be restated to reflect the full effects of the loss in the purchasing power of
the Chilean peso on the financial position of reporting entities. The method,
described in Note 1 c), is based on a model which enables calculations of net
inflation gains or losses caused by monetary assets and liabilities exposed to
changes in the purchasing power of local currency by restating all non-monetary
accounts in the financial statements. The model prescribes that the historical
cost of such accounts be restated for general price-level changes between the
date of origin of each item and the period-end. The inclusion of price-level
adjustments in the accompanying financial statements is considered appropriate
under the prolonged inflationary conditions affecting the Chilean economy.
Accordingly, and as allowed by Item 18 to Form 20-F, the effect of price-level
changes is not eliminated in the reconciliation to US GAAP included under
paragraph 1 s) below.
a) Loan origination fees and costs
The Bank recognizes commissions (origination fees) on credit card loans,
lines of credit and letters of credit when collected and records related direct
costs when incurred, Under SFAS No. 91, "Accounting for Nonrefundable Fees and
Costs Associated with Origination or Acquiring Loans and Initial Direct Costs
of Leases", loan origination fees and certain direct loan origination costs
should be recognized over the life of the related loan as an adjustment of
yield. The effect of this difference resulted in an increase in shareholders'
equity under Chilean GAAP of MCh$ 5,992 and MCh$ 6,510 at December 31, 2001 and
2002, respectively. In addition, had US GAAP been applied, net income would
have increased (decreased) by MCh$ 177 in 2000, MCh$ (328) in 2001 and MCh$ 518
in 2002.
b) Income taxes
Under Chilean GAAP, effective January 1, 1999 the Bank began recognizing
the effects of deferred income taxes on net income on a prospective basis,
using an asset and liability approach. In prior years income taxes were
recognized on the basis of amounts due in accordance with Chilean tax
regulations and no deferred income taxes were recognized. For US GAAP purposes
the Bank applies SFAS No. 109, "Accounting for Income Taxes", whereby income
taxes are also recognized using substantially the same asset and liability
approach, with deferred income tax assets and liabilities established for
temporary differences between the financial reporting basis and the tax basis
of the Bank's assets and liabilities at enacted rates expected to be in effect
when such amounts will be realized. Deferred tax assets must be reduced by a
valuation allowance when it is more likely than not that such assets will not
be realized. After the year ended December 31, 1998 Chilean GAAP and US GAAP
differ due to the recognition for US GAAP purposes of the reversal of deferred
income taxes included in the US GAAP reconciliation in prior years which are
being recognized under Chilean GAAP in 2000 and future years.
F - 52
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
c) Mandatory dividend
As required by the Chilean Company law, unless otherwise decided by the
holders of a majority of the shares represented at the General Shareholders'
Meeting, the Bank has to distribute a cash dividend in an amount equal to at
least 30% of the Bank's net income under Chilean GAAP. Since the payment of the
dividend out of each year's net income is a legal requirement in Chile, an
accrual would have been made for US GAAP purposes to recognize the dividend
obligation under Chilean law. The effect of this accrual would be to decrease
Shareholders' equity by MCh$ 4,600 and MCh$ 6,077 at December 31, 2001 and
2002, respectively.
d) Interest recognition on non-accrual loans
The Bank suspends the accrual of interest on loans on the first day that
such loans are overdue. Previously accrued but uncollected interest on overdue
loans is not reversed at the time the loan ceases to accrue interest. Under US
GAAP, recognition of interest on loans is generally discontinued when, in the
opinion of management, there is an indication that the borrower may be unable
to meet payments as they become due. As a general practice, this occurs when
loans are 90 days or more past due. Any accrued but uncollected interest is
reversed against interest income at that time.
In addition, under Chilean GAAP any payment received on overdue loans is
first applied to reduce the recorded balance of accrued interest receivable, if
any, and thereafter is recognized as income to the extent of interest earned
but not recorded. Any remaining amount is then applied to reduce the
outstanding principal balance. Under US GAAP, any payment received on loans
when the collectibility of the principal is in doubt is treated as a reduction
of the outstanding principal balance of the loan until such doubt is removed.
Management believes that the effect of the difference in interest recognition
on non-accrual loans is not material to the Bank's results of operations.
e) Troubled debt restructurings
Under Chilean GAAP, troubled debt restructurings are accounted in a manner
similar to US GAAP. The Bank, however, is not required under Chilean GAAP to
identify all loans which may qualify as troubled debt restructurings and, as a
result, it is not feasible to obtain the necessary information that should be
disclosed under US GAAP.
f) Contingent loans
The Bank recognizes rights and obligations with respect to contingent
loans as contingent assets and liabilities. Under US GAAP, such contingent
amounts are not recognized on the balance sheet but are accounted for in
memorandum accounts. Had US GAAP been followed, the total assets and
liabilities of the Bank would have been reduced as of December 31, 2001 and
2002 by MCh$ 67,117 and MCh$ 85,457 respectively. This reclassification is
included in the Article 9 financial statements in Note 27.
F - 53
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
g) Allowance for loan losses
Under Chilean GAAP, the allowance for loan losses is calculated according
to specific guidelines issued by the Superintendency of Banks as detailed in
Note 1 k). Under US GAAP, allowances for loan losses should be provided for
impaired and other loans in amounts adequate to cover inherent losses in the
loan portfolio at the respective balance sheet dates. The process followed
under Chilean GAAP differs in some respects from the process a bank would
follow under US GAAP. In this regard, the Bank has estimated its required
allowance for US GAAP purposes in the following manner:
o All loans of the Bank were classified in accordance with the rules of the
Superintendency of Banks.
o The allowances assigned to each loan category were analyzed and adjusted
to reflect estimated inherent losses for such category.
o In addition, specific additional allowances were determined for loans on
the following basis:
i) Commercial loans with balances exceeding MCh$ 30 which were considered
to be impaired in accordance with the criteria established by SFAS No. 114
"Accounting by Creditors for Impairment of a Loan" were valued at the present
value of the expected future cash flows discounted at the loan's effective
contractual interest rate or at the fair value of the collateral if the loans
were collateral dependant.
ii) Commercial loans with balances under MCh$ 30 and consumer loans were
reviewed in order to account for all inherent losses in these loans. Such
amounts were considered to approximate losses calculated under SFAS No.114, as
applicable.
Based on the above calculation, the Bank believes that there is no
significant difference between the amount of the allowance for loan losses
recorded for Chilean GAAP purposes and the amount calculated based on US GAAP
requirements (excluding restructured loans, see paragraph o) below).
h) Investments in other companies
Under Chilean GAAP, certain permanent investments of less than 20% of the
outstanding shares of other companies have been recorded using the equity
method of accounting. Under US GAAP, those investments would have been recorded
at cost. The effect of this difference resulted in an increase in shareholders'
equity under Chilean GAAP of MCh$ 470 and MCh$ 350 at December 31, 2001 and
2002, respectively. In addition, had US GAAP been applied, net income would
have increased (decreased) by MCh$ 62 in 2000, MCh$ (255) in 2001 and MCh$
(120) in 2002.
F - 54
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
i) Derivative financial instruments
The Bank engages in derivative transactions for its own account and on
behalf of its customers, mainly corporate clients of the import sector. These
transactions arise from forward exchange contracts which are of two types: (i)
transactions covering two foreign currencies and (ii) transactions covering
Chilean pesos against the U.S. dollar. Foreign exchange contracts involve an
agreement to exchange the currency of one country for the currency of another
country or an agreed-upon price and settlement date. These contracts are
generally standardized contracts, normally for periods between 30 and 90 days
and are not traded in a secondary market, however, in the normal course of
business and with the agreement of the original counterparty, they may be
terminated or assigned to another counterparty. When the Bank enters into a
forward exchange contract, it analyzes and approves the creditor's risk (the
risk that the counterparty might default on is obligation). Subsequently, on an
ongoing basis, it monitors the possible losses involved in each contract. To
manage the level of credit risk the Bank deals with counterparties of good
credit standing, enters into master netting agreements whenever possible and
when appropriate, obtains collateral.
The Central Bank requires that foreign exchange forward contracts be made
only in US dollars and other major foreign currencies. In the case of the Bank,
most forward contracts are made in US dollars against the Chilean peso or the
UF. From time to time, forward contracts are also made in other currencies, but
only when the Bank acts as an intermediary.
The Bank's counterparties in derivative transaction are mainly
international investment bank and domestic corporate and financial institution
clients.
Under Chilean GAAP, forward contracts between foreign currencies and U.S.
dollars are reported at fair value with realized and unrealized gains and
losses on these instruments recognized in other income. Forward contracts
between the U.S. dollar and the Chilean peso are valued at the closing spot
exchange rate of each balance sheet date with the initial discount or premium
being amortized over the life of the contract in accordance with Chilean hedge
accounting criteria.
Under Chilean GAAP interest rate swap agreements that hedge part of the
Bank's investment portfolio are recorded on balance sheet at their estimated
fair market values. Unrealized gains or losses are credited or charged to
income for those agreements that are designated by the Bank's management as
hedges of part of the investment portfolio classified as trading. In the case
of the interest rate swap agreements designated by the Bank's management as
hedges of part of the investment portfolio as permanent investments, unrealized
gains and losses are credited or charged to shareholders' equity.
F - 55
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Beginning January 1, 2001, the Bank for US GAAP purposes adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", as amended
by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an amendment of FASB Statement No. 133" (collectively
"SFAS 133"), which establishes comprehensive accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts, and hedging activities. The standard requires that all
derivative instruments be recorded in the balance sheet at fair value. However,
the accounting for changes in fair value of the derivative instruments depends
on whether the derivative instrument qualifies as a hedge. The standard also
requires formal documentation procedures of the hedging relationship and
effectiveness testing when hedge accounting is to be applied. If the derivative
instrument does not qualify as a hedge, changes in fair value are reported in
earnings when they occur. If the derivative instrument qualifies as a hedge,
the accounting treatment varies based on the type of risk being hedged.
While the Bank enters into derivatives for the purpose of mitigating its
global interest and foreign currency risks, these operations do not meet the
requirements to qualify for hedge accounting under U.S. GAAP. Therefore changes
in the respective fair values of all derivative instruments are reported in
earnings when they occur.
Current Chilean accounting rules do not consider the existence of
derivative instruments embedded in other contracts and therefore they are not
reflected in the financial statements. For U.S. GAAP purposes, certain implicit
or explicit terms included in host contracts that affect some or all of the
cash flows or the value of other exchanges required by the contract in a manner
similar to a derivative instrument must be separated from the host contract and
measured and accounted for as freestanding derivatives at fair value. As of
December 31, 2002 the Bank did not have embedded derivatives requiring
bifurcation.
The adoption of SFAS 133 as of January 1, 2001 has not resulted in an
effect on the results of operations of the Bank. The effects of the adjustments
with respect for foreign exchange contracts and interest rate and foreign
currency swaps agreements on the net income and net equity of the Bank are
included in paragraph s) below.
j) Employee benefits
Employee benefits and post employment benefits are provided by independent
pension funds and health insurance companies, which are funded by employees'
contributions. The Bank has no responsibility as an employer for payments under
these plans, other than withholding amounts from employees' salaries.
k) Accrued interest and indexation adjustments
Accrued interest and indexation adjustments are presented with the related
principal amounts. Under US GAAP accrued interest and indexation adjustments
would be separately recorded. The amount of this reclassification is not
readily determinable.
l) Recoveries of loans previously charged-off
Under US GAAP, recoveries of loans previously charged-off are reflected as
a reduction of the allowance for loan losses; under Chilean GAAP they are
included as Other income. This reclassification is included in the Article 9
financial statements in Note 27.
F - 56
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
m) Fees relating to contingent loans
Under US GAAP, fees relating to contingent loans are recorded as
non-interest income and not as interest income. This reclassification is shown
in the Article 9 financial statements in Note 27.
n) Investment securities
Under Chilean GAAP, investment securities held by the Bank which have a
secondary market (and an original maturity of more than one year) are carried
at market value. Securities held by the Bank's brokerage subsidiary and other
subsidiaries are carried at the lower of cost or market value. Investment
securities not falling under these categories are carried at cost.
Under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", investment securities, which include debt and certain equity
securities, are accounted for as follows:
o Debt securities that the Bank has the positive intent and ability to hold
to maturity are classified as held-to-maturity securities and are reported
at amortized cost.
o Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and are reported at fair value, with unrealized gains and
losses included in earnings.
o Debt and equity securities not classified as either held-to-maturity or
trading securities are classified as available-for-sale securities and
reported at fair value, with unrealized gains and losses excluded from
earnings and reported in a separate component of shareholders' equity.
The effect of the difference between Chilean GAAP and US GAAP in the
accounting treatment for investment securities was an increase in shareholders'
equity of MCh$ 763 and MCh$ - at December 31, 2001 and 2002, respectively, and
a(n) (decrease) increase in net income of MCh$ (1,918), MCh$ 949 and MCh$
(2,139) for the years 2000, 2001 and 2002, respectively.
o) Impairment of restructured loans
US GAAP requires creditors to value certain impaired and restructured
loans at the present value of the expected future cash flows discounted at the
loan's effective contractual interest rate, or at the fair value of the
collateral if the loan is collateral dependent. Under Chilean GAAP, a loss on
impaired and restructured loans is only recognized if the new interest rate is
inferior to the average cost of funds of the Bank. This loss is recognized
through an increase in the allowance for loan losses. Had US GAAP been
followed, net income would have increased by MCh$ 205 during 2000, MCh$ -
during 2001 and MCh$ -, during 2002.
F - 57
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
p) Fees on Automatic Teller Machines (ATM) and other services
The Bank recognizes fees on Automatic Teller Machine (ATM) cards and other
services on a cash basis. Under US GAAP, recognition of this income should be
recorded on an accrual basis. The effect of this difference resulted in a
decrease in shareholders' equity under Chilean GAAP of MCh$ 351 and MCh$ 762,
at December 31, 2001 and 2002, respectively. In addition, had US GAAP been
applied, net income would have (decreased) increased by MCh$ (226) in 2000,
MCh$ 383 in 2001 and MCh$ (411) in 2002.
q) Business combination
For US GAAP purposes, effective January 1, 2002, the Bank adopted SFAS No.
142, "Goodwill and Other Intangible Assets, " which establishes the following:
o The accounting for a recognized intangible asset is based on its
useful life to the reporting entity. An intangible asset with a
finite useful life is amortized over the life of the asset, but
goodwill and other intangible assets with indefinite useful lives are
not amortized.
o The remaining useful lives of intangible assets being amortized are
evaluated each reporting period to determine whether events and
circumstances warrant a revision to the remaining period of
amortization. If the estimate of an intangible asset's remaining
useful life is changed, the remaining carrying value of the
intangible asset is amortized prospectively over the revised
remaining useful life.
o Goodwill and other intangible assets with indefinite useful lives
that are not subject to amortization are tested for impairment at
least annually.
o All goodwill must be assigned to a reporting unit, which is defined
as an operating segment or one level below an operating segment.
SFAS No. 142 became effective for years beginning after December 15, 2001.
Accordingly, no goodwill amortization expense was recorded for US GAAP purposes
in 2002 and not impairment charge was deemed necessary.
The Bank adopted SFAS No. 147 which requires financial institutions to
adopt SFAS No. 142.
Under Chilean GAAP, the difference between the purchase price and the net
book value of assets and liabilities acquired in a purchase transaction is
considered to be goodwill and is amortized on a straight-line basis over a
period not exceeding ten years. The purchases of ownership interests in BHIF
S.A. Corredores de Bolsa in 1993 and 1997 and in Corredora Tecnica de Seguros
Ltda. in 1998, and the assets and liabilities of Banesto Chile Bank in 1995,
were recorded in accordance with Chilean GAAP.
Under US GAAP, in a business combination accounted for under the purchase
method of accounting, the acquired company's assets and liabilities are
adjusted to give effect to the purchase price paid by the acquiring company.
If, after the assets and liabilities of the acquired company have been adjusted
to their fair value at the acquisition date, the purchase price exceeds the
amount of such fair value, the excess is recorded as goodwill and is amortized
to expense over the period of benefits. The financial statements of the
constituent companies are combined as of the date of the acquisition and are
not restated for prior periods.
F - 58
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In a business combination accounted for by the purchase method involving
the acquisition of a banking institution, intangible assets acquired that can
be separately identified are assigned a portion of the total cost of the
acquired banking institution if the fair values of those assets can be reliably
determined. The fair values of such assets that relate to depositor or borrower
relationships are based on the estimated benefits attributable to the
relationship that exist at the date of acquisition without regard to new
depositors or borrowers that may replace them. Those identified intangible
assets are amortized over the estimated lives of those existing relationships.
If the fair value of liabilities assumed in the purchase exceeds the fair value
of identifiable assets acquired and such assets do not include a significant
amount of long-term interest-bearing assets, the unidentifiable intangible
asset (goodwill) is amortized over a period not exceeding the estimated average
remaining life of the existing customer (deposit) base acquired.
r) Comprehensive income
In accordance with SFAS No. 130, "Reporting Comprehensive Income", the
Bank is required to report and display comprehensive income and its components
in a full set of general purpose financial statements. "Comprehensive income"
is defined in this statement as the change in equity (net assets) of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. It includes net income and other comprehensive income
(revenues, expenses, gains and losses) that under generally accepted accounting
principles are excluded from net income.
F - 59
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
s) Effects of conforming to US GAAP
The following is a reconciliation of consolidated net income under Chilean
GAAP and the corresponding amounts under US GAAP:
For the year ended December 31,
2000 2001 2002
-------- -------- --------
MCh$ MCh$ MCh$
Net income in accordance with Chilean GAAP ......... 14,904 15,335 20,255
Loan origination fees and costs (par. 28.1. a) ..... 177 (328) 518
Deferred income taxes (par. 28.1. b) ............... (3,581) (358) (38)
Investments in other companies (par. 28.1. h) ...... 62 (255) (120)
Derivative financial instruments (par. 28.1. i) .... (127) (118) (1,537)
Investment securities (par. 28.1. n) ............... (1,918) 949 (2,139)
Impairment of loans (par. 28.1. o) ................. 205 - -
Fees on services (par. 28.1. p) .................... (226) 383 (411)
Amortization of goodwill (par. 28.1. q) ............ 14 12 389
-------- -------- --------
Net income in accordance with US GAAP .............. 9,510 15,620 16,917
Other comprehensive income (par. 28. 1. r)
Net unrealized gains (par. 28. 2. c) ............. - 33 2,481
-------- -------- --------
Comprehensive income in accordance with
US GAAP (par. 28. 1.r) ........................... 9,510 15,653 19,398
======== ======== ========
Accumulated other comprehensive income amounted to MCh$ -, MCh$ 33 and
MCh$ 2,514 as of December 31, 2000, 2001 and 2002, respectively.
The following is a reconciliation of consolidated shareholders' equity
under Chilean GAAP and under US GAAP:
Year ended
December 31,
2001 2002
---- ----
MCh$ MCh$
Shareholders' equity in accordance with Chilean GAAP ... 250,120 257,022
Loan origination fees and costs (par. 28.1. a) ......... 5,992 6,510
Deferred income taxes (par. 28.1. b) ................... 59 (451)
Accrual for mandatory dividends (par. 28.1. c) ......... (4,600) (6,077)
Investments in other companies (par. 28.1. h) .......... 470 350
Forward exchange contracts (par. 28.1. i) .............. 728 1,008
Investment securities (par. 28.1. n) ................... 763 -
Fees on services (par. 28.1. p) ........................ (351) (762)
Amortization of goodwill (par. 28.1. q) ............... 5 394
Derivative financial instruments (par. 28. i) .......... (832) (2,649)
-------- --------
Shareholders' equity in accordance with US GAAP ........ 252,354 255,345
======== ========
F - 60
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following summarizes the changes in shareholders' equity under US
GAAP during the years ended December 31, 2000, 2001 and 2002:
MCh$
----
Balance at January 1, 2000 .................................... 188,691
Reversal of accrual for minimum dividend-prior year ........... 2,886
Dividend paid ........................................... (9,519)
Minimum dividend at year end required by law ............ (4,471)
Capital increase, net ................................... 65,369
Net loss for the year ................................... 9,510
--------
Balance at December 31, 2000 .................................. 252,466
Reversal of accrual for minimum dividend-prior year ..... 4,471
Dividend paid ........................................... (15,636)
Minimum dividend at year end required by law ............ (4,600)
Other incomprehensive income for the year ............... 33
Net income for the year ................................. 15,620
--------
Balance at December 31, 2001 .................................. 252,354
Reversal of accrual for minimum dividend-prior year ..... 4,600
Dividend paid ........................................... (14,930)
Minimum dividend at year end required by law ............ (6,077)
Other incomprehensive income for the year ............... 2,481
Net income for the year ................................. 16,917
--------
Balance at December 31, 2002 .................................. 255,345
========
2. Additional disclosure requirements
a) Earnings per share
The following disclosure of earnings per share information is not required
for presentation in the financial statements under Chilean GAAP but is required
under US GAAP.
Year ended December 31,
--------------------------------------------
2000 2001 2002
---- ---- ----
Basic earnings per share-US GAAP .................................. 26.33 43.24 46.83
Weighted average number of shares outstanding ..................... 308,031,444 361,222,027 361,222,027
b) Income taxes
The provision for income taxes charged to income is as follows:
Year ended December 31,
--------------------------------------------
2000 2001 2002
---- ---- ----
Current income tax provision for the year under Chilean GAAP ...... (1,015) (6,135) (6,261)
Effect of deferred income taxes under Chilean GAAP ................ 2,999 5,254 3,743
US GAAP adjustment:
Deferred tax effect of applying SFAS 109 ..................... (3,581) (358) (38)
------------ ------------ ------------
Income tax (expense) benefit for the year under US GAAP ........... (1,597) (1,239) (2,556)
============ ============ ============
F - 61
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Deferred tax assets (liabilities) under US GAAP are summarized as follows:
Year ended December 31,
2001 2002
---- ----
MCh$ MCh$
Deferred tax assets
Allowance for loan losses, lease contracts ............. 18,570 22,921
and charged-off of assets
Allowance for losses from high-risk rated countries .... 233 234
Tax loss carryforward .................................. - 24
Others ................................................. 3,435 5,099
------- -------
22,238 28,278
======= =======
Deferred tax liabilities
Depreciation ........................................... (6,205) (9,053)
Loan origination fees and cost and deferred expenses ... (2,031) (1,969)
Others ................................................. (233) (180)
------- -------
(8,469) (11,202)
======= =======
Net deferred tax assets ................................... 13,769 17,076
======= =======
The US GAAP provision for income taxes differs from the amount of income
tax determined by applying the applicable Chilean statutory income tax rate to
US GAAP pre-tax income as a result of the following differences:
Year ended December 31,
--------------------------
2000 2001 2002
------ ------ ------
MCh$ MCh$ MCh$
At statutory Chilean income tax rate (15% in 2000 and 2001,
16% in 2002) ............................................ (1,666) (2,529) (3,116)
Increase (decrease) in rates resulting from:
Nondeductible expenses ................................ (318) (357) (508)
Nontaxable income ..................................... 666 346 382
Amortization of goodwill .............................. 2 2 62
Tax credits ........................................... (307) (48) (58)
Effect of change in enacted tax rates ................. - 1,156 806
Other ................................................. 26 191 (124)
------ ------ ------
At effective tax rate ..................................... (1,597) (1,239) (2,556)
====== ====== ======
F - 62
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
c) Investment securities
Shown below are the carrying amounts, gross unrealized gains and losses
and approximate fair value of investment securities held to maturity under US
GAAP (see paragraph 28.1.o):
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
---- ----- ------ ----------
MCh$ MCh$ MCh$ MCh$
Securities to be held to maturity
December 31, 2002
Foreign investments ................. 2,139 - (2,139) -
December 31, 2001
Foreign investments ................. 2,708 - (1,211) 1,497
Gross realized gains (losses) on sales of securities available for sale were:
Year ended December 31,
-------------------------------
2000 2001 2002
------ ------ ------
MCh$ MCh$ MCh$
Gross realized gains (losses):
Central Bank Securities ............ - 33 2,799
Other Government Agencies .......... - - 166
Domestic Financial Institutions .... - (3) (28)
Other .............................. - 3 16
------ ------ ------
Total ........................ - 33 2,953
====== ====== ======
The scheduled maturities of securities to be held to maturity at December 31,
2002 were as follows:
Securities to be
held to maturity
Fair
Amortized value cost
--------- ----------
MCh$ MCh$
Due in one year or less ....................... - -
Due from one year to five years ............... 2,139 -
------ ------
Total .................................. 2,139 -
====== ======
F - 63
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
d) Impaired loans
A loan is considered to be impaired when, based upon current information
and events, it is probable that the Bank will be unable to collect all amounts
due according to the contractual terms of the loan. Impairment is primarily
measured based on the fair value of the loan's collateral.
At December 31, 2001 and 2002, the recorded investment in loans for which
impairment has been recognized was as follows:
At December 31,
2001 2002
---- ----
MCh$ MCh$
Impaired loans ...................................... 78,734 73,273
Impaired loans with related allowances .............. 61,547 58,821
Allowance on impaired loans ......................... 20,002 19,331
Impaired loans with no related allowance ............ 17,188 14,452
Charge-offs and recoveries of loans previously charged-off
As discussed in note 1 k) of these financial statements, under Chilean
GAAP the Bank charges-off loans when collection efforts have been exhausted.
Under the rules and regulations established by the Superintendency of Banks,
charge-offs must be made within the following maximum prescribed limits:
- 24 months after a loan is past due (3 months for consumer loans) for
loans without collateral;
- 36 months after a loan is past due for loans with collateral.
Under U.S. GAAP loans should be written-off in the period that they are
deemed uncollectible. The Bank believes that the charge-off policies it applies
in accordance with Chilean GAAP are substantially the same as those required
under U.S. GAAP, and therefore that differences are not significant to the
presentation of its financial statements.
e) Segment information
Effective 1998, the Bank adopted SFAS No. 131 "Disclosure about Segments
of an Enterprise and Related Information". This standard establishes standards
for reporting information about operating segments and related disclosures
about products and services and geographic areas. Operating segments are
defined as components of an enterprise about which separate financial
information is available that is regularly used by the chief operating decision
making group in deciding how to allocate resources and assess performance.
The Bank has strategically aligned its operations into three business
segments based on its market segmentation and the needs of its clients and
trading partners. The three business segments are Retail banking (Residential
mortgage lending and consumer lending); Corporate banking; and Business
banking. The Bank manages these business segments using an internal
profitability reporting system. The accounting policies of the operating
segments are the same as those described in the summary of significant
accounting policies, except as noted below. The information generated is not
necessarily comparable with similar information from any other financial
institution.
F - 64
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Bank uses total operating income excluding provisions for loan losses
(TOIBP) in measuring the financial performance of its operating segments. For
this purpose, the internal profitability reporting system uses a transfer rate
method that assumes perfect matching in maturities or repricing periods and
currencies when the net interest revenue has to be allocated across segments.
The difference between the actual total net interest revenue and that arising
from the abovementioned method, called "gap difference", is allocated to the
Corporate banking segment.
Descriptions of each business segment are as follows:
o Mortgage lending is the Bank's oldest and most developed retail business.
In particular, residential mortgage lending business continues to play a
significant role as part of the Bank's strategy of cross-sellings its
products to the retail market.
o Consumer lending includes personal loans, automotive financing and credits
cards.
o Corporate banking includes a full range of financial products and services
to large size companies in Chile, including commercial loans, working
capital lines of credit, trade financing, payment services and short-term
and other deposits.
o Business banking includes a full range of financial products and services
to small and medium size companies.
The following table presents summary information in millions of Chilean
pesos related to the Bank's lines of business for the years ending December 31,
2000, 2001 and 2002.
2000
----------------------------------------------------------------------
Residential
mortgage Consumer Business Corporate Reconciling
lending lending banking banking items (2) Total
------- ------- ------- ------- --------- -----
Operating net interest income (1) ... 5,093 7,704 37,326 31,728 3,556 85,407
Income from services, net ........... 407 4,335 2,245 1,274 3,534 11,795
TOIBP ............................... 5,500 12,039 39,571 33,002 7,090 97,202
Interest earnings assets (3) ........ 376,879 172,191 409,508 656,242 - 1,614,820
2001
----------------------------------------------------------------------
Residential
mortgage Consumer Business Corporate Reconciling
lending lending banking banking items (2) Total
------- ------- ------- ------- --------- -----
Operating net interest income (1) ... 8,363 29,500 37,059 18,899 3,913 97,734
Income from services, net ........... - 10,003 1,052 1,951 4,222 17,228
TOIBP ............................... 8,363 39,503 38,111 20,850 8,135 114,962
Interest earnings assets (3) ........ 389,271 198,640 459,263 731,577 - 1,778,751
2002
----------------------------------------------------------------------
Residential
mortgage Consumer Business Corporate Reconciling
lending lending banking banking items (2) Total
------- ------- ------- ------- --------- -----
Operating net interest income (1) ... 6,278 32,210 25,814 30,992 5,525 100,819
Income from services, net ........... 2,054 7,553 774 6,269 5,112 21,762
TOIBP ............................... 8,332 39,763 26,588 37,261 10,637 122,581
Interest earnings assets (3) ........ 454,661 228,496 550,499 741,577 - 1,975,233
F - 65
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(1) Operating net interest income includes: Net interest revenue and Other
operating income, net, because, with respect to the latter, the bank
considers gains and losses from financial instruments and from foreign
exchange transactions to be an integral part of the generation of interest
income and the incurrence of interest expense.
(2) Reconciling items mainly include the amounts related to the earnings of
the subsidiaries mentioned in Note 1.a).
(3) For purposes of this table, interest earnings assets include only the
Bank's average balances of loans.
(4) Reconciliations
Set forth below are reconciliations of segment information to the
consolidated financial statements:
2000 2001 2002
---- ---- ----
MCh$ MCh$ MCh$
Net interest revenue ................... 80,079 93,342 109,014
Total other operating income, net ...... 5,328 4,392 (8,195)
-------- -------- --------
Operating net interest income, total ... 85,407 97,734 100,819
======== ======== ========
There are no significant intersegment results, except for the gap
difference mentioned above for 2000, 2001 and 2002.
As the Bank's business activity is exclusively carried out in Chile, no
information by geographic area is provided.
a) Recent accounting pronouncements
In September 2002, the Chilean Superintendency of Banks issued Circular
No. 3,189, which changed the method for calculating and accounting for the
allowances related to credit risk. Under the new standard, Chilean banks are
permitted to use the evaluation methods and models that each bank consider
appropriate based on its specific kind of loan portfolio or transactions,
following the general guidelines instructed by the Superintendency. Such models
and further modifications have to be approved by the board of directors. The
Bank is required to adopt the provisions as of January 1, 2004.
F - 66
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". FAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes the
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, the entity either settles the obligation for the
amount recorded or incurs a gain or loss. FAS No. 143 is effective for fiscal
years beginning after June 15, 2002. Although the Bank is evaluating the
effects of this Statement on its financial position and results of operations,
management does not consider that the adoption of this Statement will have a
material impact on the results of its operations.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities" (FAS 146). This statement
supercedes Emerging Issues Task Force (EITF) Issue No. 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)". FAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability is recognized at the date an entity commits to an exit plan. FAS 146
also establishes that the liability should initially be measured and recorded
at fair value. The provisions of FAS 146 will be effective for any exit and
disposal activities initiated after December 31, 2002. The Bank is evaluating
the effect of this statement on its financial position and results of
operations, however, it does not expect that the adoption will have a material
impact on the Bank's results of operations or financial position.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. Initial
recognition and measurement provisions of FIN 45 are applicable on a
prospective basis to guarantees issued or modified. The Bank is evaluating the
impact of the new interpretation, however, the adoption of FIN 45 is not
expected to material impact on Bank's results of operations or financial
position.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-
Based Compensation- Transition and Disclosure- an amendment of FASB Statement
No. 123" (FAS 148). This statement amends SFAS No. 123 "Accounting for Stock
Based Compensation" (FAS 123) to provide alternative methods of voluntarily
transitioning to the fair value based method of accounting for stock-based
employee compensation. FAS 148 also amends the disclosure requirements of FAS
123 to require disclosure of the method used to account for stock-based
employee compensation and the effect of the method on reported results in both
annual and interim financial statements. The Bank is evaluating the effect of
this statement on its financial position and results operations, however,
management does not expect that the adoption will have a material impact on its
results of operations or financial position.
F - 67
BBVA BANCO BHIF
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45") requires that upon issuance of
a guarantee, a guarantor must recognize a liability for the fair value of an
obligation assumed under a guarantee. FIN 45 also requires additional
disclosures by a guarantor in its interim and annual financial statements about
the obligations associated with guarantees issued. The recognition provisions
of FIN 45 will be effective for any guarantees that are issued or modified
after December 31, 2002. The disclosure requirements will be effective for our
third quarter of fiscal 2003. The Bank is currently evaluating the impact of
the new interpretation; however, that the adoption of FIN 45 is not expected to
have a material impact on the Bank's results of operations or financial
position.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-
Based Compensation- Transition and Disclosure- an amendment of FASB Statement
No. 123" ("FAS 148"). This statement amends SFAS No. 123 "Accounting for Stock
Based Compensation" ("FAS 123") to provide alternative methods of voluntarily
transitioning to the fair value based method of accounting for stock-based
employee compensation. FAS 148 also amends the disclosure requirements of FAS
123 to require disclosure of the method used to account for stock-based
employee compensation and the effect of the method on reported results in both
annual and interim financial statements. The Bank believes that this statement
will not be applicable to them, when adopted.
In January 2003, the FASB issued Interpretation 46, "Consolidation of
Variable Interest Entities" ("FIN 46") requires that companies that control
another entity through interests other than voting interests should consolidate
the controlled entity. FIN 46 applies to variable interest entities created
after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest in after that date. The related disclosure
requirements are effective immediately. The Bank is presently evaluating the
impact of the new interpretation, however, management does not expect that the
adoption will have a material impact on its results of operations or financial
position.
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